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Shareholder Oppression and "Fair Value": Of Discounts, Dates, and Dastardly Deeds in
the Close Corporation

Author(s): Douglas K. Moll
Source: Duke Law Journal , Nov., 2004, Vol. 54, No. 2 (Nov., 2004), pp. 293-383
Published by: Duke University School of Law
Stable URL: https://www.jstor.org/stable/40040488
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Duke Law Journal
Volume 54 November 2004 Number 2
SHAREHOLDER OPPRESSION AND "FAIR

VALUE": OF DISCOUNTS, DATES, AND
DASTARDLY DEEDS IN THE CLOSE
CORPORATION
Douglas K. Moixt
ABSTRACT
The doctrine of shareholder oppression protects a close

corporation minority investor from the improper exercise of
majority control When a minority shareholder establishes
"oppressive" majority conduct, a court typically orders the
majority to purchase the minority's stock at its "fair value. " But
what does fair value mean? Further, when is fair value to be
measured? The questions are critical ones that affect the lives of
countless close corporation investors and that generate an
enormous amount of present-day litigation. This Article builds
a case for defining fair value as enterprise value in the
shareholder oppression context. The Article argues, in other
words, that the buyout remedy should provide an oppressed
minority investor with his pro rata share of the company's
overall value, with no reductions (or "discounts") for the lack
of control or liquidity associated with the minority's shares.
Copyright © 2004 by Douglas K. Moll.

t George Butler Research Professor of Law, University of Houston Law Center. J
Harvard Law School, 1994; B.S., University of Virginia, 1991. The author wishes to thank
Blain, Patrick Elkins, Adam Goldberg, Andrea Houston, Stefanie Moll, Michael Muskat,
Robert Ragazzo for their comments and assistance on earlier drafts.

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294 DUKE LAW JOURNAL [Vol. 54:293
Moreover, the Article suggests that, in many

should allow an oppressed shareholder to c
"date of filing" and the "date of oppression
valuation date.
Table of Contents
Introduction
I. The Doctrine of Shareholder Oppression
A. The Nature of the Close Corporation
B. The Cause of Action for Oppression
C. Measuring Oppression th
Expectations"
D. The Buyout Remedy for Oppression

II. "Fair Value" and the Problem of Discounts
A. The Ambiguity of "Fair Value"
B. The Minority Discount
C. The Marketability Discount.
III. Building the Case against Discounts
A. Strengths of the Case
1. Context Matters
2. Statutory Language
3. The Undercompensation Argument

B. Weaknesses of the Case
1. The Dissolution Analogy

2. The Punishment Rationale
3. The Liquidity Assertion
C. Summary
IV. The Valuation Date
A. Current Framework..
B. A Rationale for the "Date of Filing"

1. Election Cases
2. Nonelection Cases
C. Plaintiffs
Oppression"
Conclusion
Introduction
Value makes the world go 'round - at least the world of

corporate law. Shareholders want it, managers chase it, and the

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2004] SHAREHOLDER OPPRESSION AND "FAIR VALUE" 295
investment community celebrates it. The task of measuring value,

therefore, is an important one. In the close corporation context, the
task of measuring value is a particularly thorny one as well, as a close
corporation, by definition, lacks a market for its stock.1 Consequently,
the value of an ownership stake in a close corporation cannot be
determined merely by referencing a well-established market price.
Despite this difficulty, the need to determine the "fair value" of
close corporation stock has arisen with great frequency in recen
years. This frequency has coincided with the rise of the shareholde
oppression doctrine - a doctrine that seeks to safeguard the clos
corporation minority investor from the improper exercise of majorit
control.2 Over the past few decades, a number of jurisdictions have
authorized, either by statute or judicial decision, a buyout of an
"oppressed" close corporation investor's stock at the "fair value" of
the shares.3 When a minority investor establishes shareholder
oppression, in other words, the question of fair value often take
center stage, as the remedy for oppression typically involves a court-
ordered buyout of the minority's holdings at a judicially determined
fair value. For close corporation shareholders seeking to exit an
oppressive situation, therefore, fair value is a concept of considerabl
significance.
But what does "fair value" mean? The question affects the lives
of countless close corporation investors and is, as a result, of
tremendous importance. Some actual numbers are telling. In a
Minnesota lawsuit, an expert witness in business valuation opined
that the fair value of an oppressed minority's one-third ownership
1. See, e.g., Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 514 (Mass. 1975) ("In a
large public corporation, the oppressed or dissident minority stockholder could sell his stock in
order to extricate some of his invested capital. By definition, this market is not available for
shares in the close corporation."); infra notes 31-32 and accompanying text (noting that close
corporation stock lacks a market).
2. See, e.g., Bonavita v. Corbo, 692 A.2d 119, 124 (NJ. Super. Ct. Ch. Div. 1996) (noting
that the "thrust" of the oppression-triggered dissolution statute "is protection from the abusive
exercise of power"); id. at 128 ("[I]t is the 'wielding of ... power' in a manner which 'destroy [s]
a stockholder's vital interest and expectations' that constitutes oppression." (alteration and
omission in original) (quoting In re Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984));
see also infra Part I (describing the shareholder oppression doctrine).
The terms "majority" and "minority" are used in this Article to "distinguish those
shareholders who possess the actual power to control the operations of the firm from those who
do not." J.A.C. Hetherington & Michael P. Dooley, Illiquidity and Exploitation: A Proposed
Statutory Solution to the Remaining Close Corporation Problem, 63 VA. L. Rev. 1, 5 n.7 (1977).
Such power is "most often determined by the size of the shareholdings." Id.
3. See infra Part I.D (describing the buyout remedy for oppression).

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stake in a company was $46,665.4 The trial co

that the fair value of the same one-third
$475,3815 - more than ten times the exp
staggering difference largely resulted from two
to the meaning of "fair value" - conflicting a
still argue over today.
The first approach equates fair value wi
Under this position, a court values an oppress
considering what a hypothetical purchaser
Because minority shares, by definition, lack
purchaser is likely to pay less for minority shar
possess control (the "minority discount").7 M
corporation shares lack a ready market an
difficult to liquidate, a hypothetical purchaser
close corporation shares than for readily tra
shares (the "marketability discount").8 Unde
interpretation of fair value, therefore, min
discounts are appropriate. In the Minnesota la
value appraisal of $46,665 was derived by
minority discount and a 35 percent marke
value of the oppressed investor's one-third sta
The second approach to the meaning of fa
value simply as a pro rata share of a compan
close corporation is valued at $10 million, for
of a 25 percent minority ownership position i
25 percent of the overall company value, or
"enterprise value" approach, discounting
4. See Advanced Communication Design, Inc. v. Follett,

2000) (describing the expert's testimony).
5. Id. at 289. This comparison requires some additional e
(clarifying the comparison).
6. See infra Part II.A (discussing the meaning of "fair valu
7. See infra Part II.B (describing the minority discount).
8. See infra Part II. C (describing the marketability discoun
9. See Follett, 615 N.W.2d at 288 (describing the calculat
the value of the company at $875,000. Id. On a pro rata basis,
interest in the company was worth $291,667. A 75 percent min
sum to $72,917, and a 35 percent marketability discount on the
The slight difference between this figure and the $46,665 sum
rounding. For further detail on how discounts are applied in
note 97.
10. See infra Part II.A (discussing the meaning of "fair value").

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control and lack of liquidity is inappropriate. In the Minnesota

lawsuit, the trial court's fair value appraisal of $475,381 was premised
on this competing enterprise value standard.11
Because the combined effect of minority and marketability
discounts can reduce the value of a pro rata stake in a company by 50
percent or more,12 the propriety of discounts and the related debate
over the meaning of fair value are issues of critical importance to
close corporation investors. Significantly, these issues are far from
settled, as there is considerable disagreement over the
appropriateness of discounts in the shareholder oppression setting.13
Indeed, the fight over discounts is perhaps the most frequently
litigated valuation issue in close corporation disputes today.
Just as oppressed investors are affected by the meaning of "fair
value" in a buyout proceeding, so too are they affected by the choice
of the valuation date. As mentioned, the remedy for shareholder
oppression typically involves a buyout of an aggrieved investor's
holdings at the fair value of the shares - but fair value as of when?
The date of the oppressive conduct? The date of the filing of the
oppression lawsuit? The date of trial? The date of judgment? In the
age of corporate scandals and internet ventures, it hardly needs
11. See Follett, 615 N.W.2d at 288-89 (noting that the trial court "found the fair value of
[the oppressed investor's] shares to be one-third of the majority's appraised value of $1,426,143
of [the company] as an enterprise, or $475,381").
To be fair, the difference between the expert's $46,665 valuation of the oppressed
investor's one-third ownership interest and the trial court's $475,381 valuation of the same
interest, see id., does not result solely from the ambiguity in the meaning of fair value and the
corresponding disagreement over discounts. Even if the expert and the trial court had both used
an "enterprise value" approach to fair value, there would still have been a sizable differential, as
the expert valued the company at $875,000, whereas the trial court adopted a company
valuation of $1,426,143. See id. at 288. Thus, even under the same enterprise value standard, the
expert would have valued a one-third ownership interest at $291,667, whereas the trial court
would have valued it at $475,381. To truly compare the effect of discounts, the same company
value must be used. If the expert's 75 percent minority discount and 35 percent marketability
discount had been applied to the trial court's $1,426,143 company valuation, see supra note 9
and accompanying text, the expert would have valued the oppressed investor's one-third stake
at approximately $77,249 ($1,426,143 / 3 x .25 x .65). See infra note 97 (describing how discounts
are applied in a valuation calculation). In that case, the trial court's enterprise value assessment
of $475,381 for the oppressed investor's one-third interest would have been more than six times
the expert's fair market value assessment of $77,249.
12. See infra note 97 and accompanying text (describing the cumulative effect of discounts).
13. See, e.g., Balsamides v. Protameen Chems., Inc., 734 A.2d 721, 734 (N.J. 1999) (noting
that, in dissenters' rights cases, "there is no clear consensus on whether a marketability discount
should be applied," and stating that "[t]here is even less consensus about whether discounts
should be applied in oppressed shareholder actions").

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saying that a company's value can change dra

short period of time. In a New Jersey case, for
close corporation declined by over 71 per
expert, in a seven-month period.14 Given ho
fortunes can change, the question of when to
critical inquiry in and of itself, as the ch
significant impact on the ultimate fair value con
This Article grapples with the difficult valuation issues
surrounding discounts and dates in the shareholder oppression
context. The Article methodically builds a case against discounts by
using both conventional and novel arguments that are tailored to the
shareholder oppression setting. In the course of constructing that
case, the Article challenges some of the traditional arguments that
courts and commentators have routinely relied on - and still rely on -
to reject discounts. Further, by discussing the valuation date and
various factors that should affect its designation, this Article
underscores that the choice of the valuation date is an independently
important component of the fair value analysis.
Part I of this Article provides necessary background information
by discussing the nature of the close corporation, the development of
the shareholder oppression doctrine, and the operation of the buyout
remedy. Part II explores the concept of fair value and examines how
its ambiguous meaning gives rise to the problem of discounts. Part III
argues that the enterprise value interpretation of fair value is a
superior approach in the shareholder oppression setting. Because the
forced redemption nature of the oppression buyout bears little
resemblance to the fair market value conception of a voluntary sale,
and because the rationale for minority and marketability discounts is
absent in many (if not most) buyout proceedings, this Part contends
that the fair market value approach - together with its reliance on
discounts - should be rejected. The conscious decision by many state
legislatures to use "fair value" in their buyout statutes rather than
"fair market value" further supports this position. Finally, because
the substantial damage caused by oppressive behavior is not fully
remedied by a conventional buyout award, this Part suggests that any
14. See Torres v. Schripps, Inc., 776 A.2d 915, 918-19, 922 (N.J. Super. Ct. App. Div. 2001)
(noting one expert's conclusion that the value of a close corporation had declined from $222,400
on February 28, 1997 (the date when the plaintiff minority was terminated from employment
with the company) to $64,000 on September 29, 1997 (the date when the company was sold)).

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"overcompensation" caused by the absence of discounts is justified by

the "undercompensation" that the buyout award otherwise provides.
Part III continues by challenging some of the traditional
arguments that courts and commentators raise in their opposition to
discounts. The limitations of the dissolution analogy, the punishmen
rationale, and the liquidity assertion are all examined. Such
arguments are problematic because they may work against the
oppressed investor's interests and, more importantly, they fail to
provide solid bases for rejecting discounts. To the extent that other
courts perceive the arguments' analytical weaknesses, those courts
may feel less inclined themselves to reject the application of
discounts. Part IV discusses the valuation date and explores the
critical question of when fair value should be measured. Although
sound reasons exist for choosing the date of filing of an oppression
lawsuit as the valuation date, this Part suggests that a "plaintiff's
choice" framework is appropriate in many disputes. When an
oppressed shareholder has been wrongfully ousted from participation
in the management of a company, allowing the aggrieved investor to
choose between the date of filing and the date of oppression is a
defensible position.
I. The Doctrine of Shareholder Oppression
A. The Nature of the Close Corporation
A close corporation is a business organization typified b

number of stockholders, the absence of a market for the co
stock, and substantial shareholder participation in the mana
the corporation.15 In the traditional public corpora
15. See, e.g., Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 511 (
(describing close corporations); Daniel S. Kleinberger, Why Not Good Faith?
Fairness in the Law of Close Corporations, 16 WM. MITCHELL L. REV. 1143
("Close corporations have a limited number of shareholders, and most, if n
shareholders are active in the corporation's day-to-day business.").
There is some variation in the definition of a close corporation. See ME
Eisenberg, Corporations and Other Business Organizations 338 (8th unabr. ed.
2000) ("[W]hat constitutes a close corporation is a matter of theoretical dispute. Some
authorities emphasize the number of shareholders, some emphasize the presence of owner-
management, some emphasize the lack of a market for the corporation's stock, and some
emphasize the existence of formal restrictions on the transferability of ... shares."); 1 F. HODGE
O'Neal & Robert B. Thompson, O'Neal's Close Corporations § 1.02, at 1-4 to 1-7 (3d
ed. 2002) [hereinafter CLOSE CORPORATIONS] (noting the following possible definitions of a
"close corporation": a corporation with relatively few shareholders, a corporation whose shares

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shareholder is normally a detached investor w

labor to the corporation nor takes part in man
within a close corporation, "a more intimate a
exists between capital and labor."17 Close cor
"usually expect employment and a meaningfu
as well as a return on the money paid for [th
close corporation investors are often linke
personal relationships that result in a fam
participants.19
Conventional corporate law norms of majority rule and
centralized control can lead to serious problems for the close
corporation minority shareholder.20 Traditionally, most corporate
power is centralized in the hands of a board of directors.21 In a close
are not generally traded in the securities markets, a corporation in which the participants
consider themselves partners inter se, a corporation in which management and ownership are
substantially identical, and any corporation that elects to place itself in a close corporation
grouping). Nevertheless, the typical close corporation possesses most, if not all, of the attributes
described in these various definitions.
16. See 1 CLOSE CORPORATIONS, supra note 15, § 1.08, at 1-31 to 1-32 (describing the
passive investor).
17. Robert B. Thompson, The Shareholder's Cause of Action for Oppression, 48 BUS. LAW.
699, 702 (1993).
18. Id.; see, e.g., Pedro v. Pedro, 463 N.W.2d 285, 289 (Minn. Ct. App. 1990) ("[T]he
primary expectations of minority shareholders include an active voice in management of the
corporation and input as an employee."); 1 CLOSE CORPORATIONS, supra note 15, § 7.02, at 7-4
("Ownership and management frequently coalesce in closely held corporations, where not
uncommonly all the principal shareholders devote full time to corporate affairs. Even where one
or two shareholders may be inactive, the business is normally conducted by the others without
aid from nonshareholder managers.").
19. See, e.g., Robert B. Thompson, Corporate Dissolution and Shareholders' Reasonable
Expectations, 66 WASH. U. L.Q. 193, 196 (1988) (discussing relationships among close
corporation participants); see also Bostock v. High Tech Elevator Indus., Inc., 616 A.2d 1314,
1320-21 (N.J. Super. Ct. App. Div. 1992) ("[A] close[] corporation frequently originates in the
context of personal relationships. Often such business entities are formed by family members or
friends." (citation omitted)).
20. See 1 F. HODGE O'NEAL & ROBERT B. THOMPSON, O'NEAL'S OPPRESSION OF
Minority Shareholders § 1:02, at 1-3 to 1-4 (2d ed. 1985) [hereinafter Oppression]
(characterizing majority rule and centralized management as the "traditional pattern of
corporate] management," and noting the dangers that this management pattern presents to
close corporation minority shareholders); Thompson, supra note 17, at 702-03 ("In a closed
setting, the corporate norms of centralized control and majority rule easily can become
instruments of oppression.").
21. See MODEL BUS. CORP. ACT § 8.01(b) (2002) ("All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the corporation managed by or
under the direction of, its board of directors
traditional theory, ultimate authority resides with the board o

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corporation, the board is ordinarily controlled "by the shareholde

shareholders holding a majority of the voting power."22 Through
control of the board, the majority shareholder has the ability to
actions that are harmful to the minority shareholder's interests.23 Su
actions are often referred to as "freeze-out" or "squeeze-ou
techniques24 that "oppress"25 the close corporation mino
shareholder. Common freeze-out techniques include the refus
declare dividends, the termination of a minority sharehold
employment, the removal of a minority shareholder from a posi
of management, and the siphoning off of corporate earnings thro
high compensation to the majority shareholder.26 Quite often, th
tactics are used in combination. For example, a close corpora
investor generally looks to salary more than dividends for a shar
the business returns because the "[ejarnings of a close corpora
22. Kleinberger, supra note 15, at 1151-52; see, e.g., 1 OPPRESSION, supra note 20, § 1:
1-3 ("Indeed, in most closely held corporations, majority shareholders elect themselves
their relatives to all or most of the positions on the board.").
23. See, e.g., Bostock, 616 A.2d at 1320 ("[B]ased upon its voting power, 'the major
able to dictate to the minority the manner in which the [close] corporation is run.'" (qu
Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984), dismissed, 791 F.2d 920 (3
1986))); Meiselman v. Meiselman, 307 S.E.2d 551, 558 (N.C. 1983) ("[W]hen the per
relationships among the participants break down, the majority shareholder, because of
greater voting power, is in a position to terminate the minority shareholder's employment
to exclude him from participation in management decisions."); Kiriakides v. Atlas Food S
Servs., Inc., 541 S.E.2d 257, 267 (S.C. 2001) ("This unequal balance of power often lead
'squeeze out' or 'freeze out' of the minority by the majority shareholders." (footnote omi
see also Fix v. Fix Material Co., 538 S.W.2d 351, 358 (Mo. Ct. App. 1976) ("In the instant c
group of four shareholders], acting in concert, control a majority of the outstanding
though no single shareholder owns 51%."); id. ("Because this control carries the pow
destroy or impair the interests of minority owners, the law imposes equitable limitations o
rights of dominant shareholders to act in their own self-interest.").
24. See 1 OPPRESSION, supra note 20, § 1:01, at 1-3 n.2 ("The term 'freeze-out' is often
as a synonym for 'squeeze-out.'"). Professors O'Neal and Thompson note that the
"squeeze-out" means "the use by some of the owners or participants in a business enterpr
strategic position, inside information, or powers of control, or the utilization of some
device or technique, to eliminate from the enterprise one or more of its owners or particip
1 id. at 1-1. Similarly, a "partial squeeze-out" is defined as "action which reduces t
participation or powers of a group of participants in the enterprise, diminishes their claim
earnings or assets, or otherwise deprives them of business income or advantages to which
are entitled." 1 id. at 1-1 to 1-2. See generally 1 id. §§ 4:01-4:08, at 4-1 to 4-61; 5:01-5:39, at
5-313; 2 id. §§ 6:01-6:17, at 6-1 to 6-97 (discussing various squeeze-out techniques).
25. See infra notes 43-45 and accompanying text (describing judicial definition
"oppression").
26. See 1 OPPRESSION, supra note 20, §§ 3:04, 3:06, 3:07, at 3-13 to 3-20, 3-37 to 3-58
(discussing freeze-outs); see also Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 513 (Mass.
1975) (noting some of the possible freeze-out techniques).

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often are distributed in major part in salaries

benefits."27 When actual dividends are
shareholder who is discharged from employm
the board of directors is effectively den
investment as well as any input into the manage
Once a minority shareholder faces this "inde
return on the capital he or she contributed t
majority often proposes to purchase the s
shareholder at an unfairly low price.30
27. 1 Close Corporations, supra note 15, § 1.08, at 1-32; s

at 1148 ("Payout is frequently in the form of salary rather than
When calculating its taxable income, a close corporation
paid to its employees to "reduce the amount of income tax that
supra note 19, at 197 n.12 (citing I.R.C. § 162 (1986)). A clo
deduct any dividends paid to its shareholders. Id. As a conse
dividends is subject to double taxation - once as business inc
once as personal income at the shareholder level. Id. at 197
discouragement of dividends" in favor of salaries, "most close
participants in the form of salary or other employee-related b
at 714 n.90; see also Morrow v. Martschink, 922 F. Supp.
shareholders have been paid a salary and/or director's fees thro
to avoid the double taxation embodied in a dividend distribut
20, § 1:03, at 1-4 to 1-5 ("[A] close corporation, in order to a
usually pays out most of its earnings in the form of salaries rat
28. See, e.g., Balvik v. Sylvester, 411 N.W.2d 383, 388 (N.D.
fired as an employee of the corporation, thus destroying the
investment. Any slim hope of gaining a return . . . and remain
the business was dashed when Sylvester removed Balvik as a
Close Corporations, supra note 15, § 1.15, at 1-89 ("[A
corporation, expecting to receive a return on the investment
would face the risk that, after a falling out . . . the director
shareholder's employment and deprive that investor of any ret
also Naito v. Naito, 35 P.3d 1068, 1072 (Or. Ct. App. 2001) ("Em
was, as a practical matter, the only way that shareholders cou
from their shares.").
29. Thompson, supra note 17, at 703; see 1 CLOSE CORPORA
1-96 ("If, for example, the minority shareholder is fired
providing the return on the investment in the close corpor
indefinite period with no return on the investment."); Charl
Effective Remedies for Minority Shareholders and Its Impact u
65 NOTRE Dame L. Rev. 425, 447 (1990) ("[T]he primary
shareholder is the spectre of being 'locked-in,' that is, having a
without any expectation of ever receiving a return on that inve
30. See, e.g., Donahue, 328 N.E.2d at 515 ("Majority 'freeze-
dividends are designed to compel the minority to relinquish
the minority stockholder agrees to sell out at less than fa
(citations omitted)); 2 CLOSE CORPORATIONS, supra note 15
squeeze-out usually does not offer fair payment to the 'squee

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In a public corporation, a minority shareholder can escape these

abuses of power simply by selling his shares on the market. In a close
corporation, of course, there is no ready market for the company's
shares.31 Thus, when a close corporation investor is treated unfairly,
he "cannot escape the unfairness simply by selling out at a fair
price."32
B. The Cause of Action for Oppression
Over the years, state legislatures and courts have developed two
significant avenues of relief for the oppressed close corporation
shareholder. First, many state legislatures have amended their
corporate dissolution statutes to include oppression by the controlling
shareholder as a ground for involuntary dissolution of a corporation.33
When oppressive conduct occurs, however, actual dissolution is not
the only remedy at a court's disposal. Both state statutes and judicial
precedents have authorized alternative remedies for oppression that
are less drastic than dissolution - for example, buyouts and
provisional directors.34 As the alternative forms of relief have
powers which they lose"); Thompson, supra note 17, at 703-04 (observing that in a classic
freeze-out "the majority first denies the minority shareholder any return and then proposes to
buy the shares at a very low price").
31. See, e.g., Donahue, 328 N.E.2d at 514 ("In a large public corporation, the oppressed or
dissident minority stockholder could sell his stock in order to extricate some of his invested
capital. By definition, this market is not available for shares in the close corporation."); Brenner
v. Berkowitz, 634 A.2d 1019, 1027 (NJ. 1993) ("[U]nlike shareholders in larger corporations,
minority shareholders in a close corporation cannot readily sell their shares when they become
dissatisfied with the management of the corporation."); Bostock v. High Tech Elevator Indus.,
Inc., 616 A.2d 1314, 1320 (NJ. Super. Ct. App. Div. 1992) ("[A] minority interest in a close[]
corporation is difficult to value because the shares are not publicly traded and a fair market is
often not available."); 2 CLOSE CORPORATIONS, supra note 15, § 9.02, at 9-4 to 9-5 ("[A]
shareholder in a close corporation does not have the exit option available to a shareholder in a
publicly held corporation, who can sell [his] shares in a securities market if [he is] dissatisfied
with the way the corporation is being operated."); Thompson, supra note 17, at 702 ("[T]he
economic reality of no public market deprives investors in close corporations of the same
liquidity and ability to adapt available to investors in public corporations.").
32. Kleinberger, supra note 15, at 1149; cf. Walensky v. Jonathan Royce Int'l, Inc., 624
A.2d 613, 615 (NJ. Super. Ct. App. Div. 1993) ("The interest owned by a minority shareholder
in a closely held corporation is often a precarious one. In fact, it has been characterized by this
court as being one of 'acute vulnerability.'").
33. See Thompson, supra note 17, at 708 (describing the dissolution statutes). See generally
Murdock, supra note 29, at 452-61 (describing the development of oppression as a ground for
dissolution).
34. See infra notes 54-55 and accompanying text (discussing alternative remedies).

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broadened, orders of actual dissolution have

Thus, oppression has evolved from a statutory
dissolution to a statutory ground for a wide var
Second, particularly in states without an o
dissolution statute, some courts have imposed
close corporation shareholders and have a
shareholder to bring a direct cause of action for
In the seminal decision of Donahue v. Rodd
Massachusetts Supreme Judicial Court adopted
[W]e hold that stockholders in the close co
another substantially the same fiduciary duty in t
enterprise that partners owe to one anothe
decisions, we have defined the standard of duty
one another as the "utmost good faith and loya
close corporations must discharge their management and
stockholder responsibilities in conformity with this strict good faith
standard. They may not act out of avarice, expediency or self-
interest in derogation of their duty of loyalty to the other
stockholders and to the corporation.39
35. Thompson, supra note 17, at 708; cf Harry J. Haynsworth, The Effectiveness of
Involuntary Dissolution Suits as a Remedy for Close Corporation Dissension, 35 CLEV. St. L.
Rev. 25, 53 (1986) (finding that courts ordered remedies other than dissolution in the majority
of thirty-seven involuntary dissolution cases studied). See generally Murdock, supra note 29, at
461-64 (discussing the development of alternative remedies).
36. See 2 CLOSE CORPORATIONS, supra note 15, § 9.27, at 9-159 ("The inclusion of
'oppression' and similar grounds as a basis for involuntary dissolution or alternative remedies
has opened up a much broader avenue of relief for minority shareholders caught up in a close
corporation wracked with dissension."); Thompson, supra note 17, at 708-09 ("[I]t makes more
sense to view oppression not as a ground for dissolution, but as a remedy for shareholder
dissension.").
37. See Thompson, supra note 17, at 726 (discussing the fiduciary duty that close
corporation shareholders owe one another); see also id. at 739 ("It should not be surprising that
the direct cause of action is developed particularly in states without an oppression statute . . . .");
id. (stating that the direct cause of action "provides a vehicle for relief for minority shareholders
in a close corporation where the statutory norms reflect no consideration for the special needs
of such enterprises"). See generally Murdock, supra note 29, at 433-40 (discussing the
development of the shareholder fiduciary duty).
38. 328 N.E.2d 505 (Mass. 1975).
39. Id. at 515 (citations and footnotes omitted). The Donahue duty of "utmost good faith
and loyalty," however, was later scaled back by the same court. Due to concerns that the
"untempered application of the strict good faith standard enunciated in Donahue . . . [would]
result in the imposition of limitations on legitimate action by the controlling group in a close
corporation which [would] unduly hamper its effectiveness in managing the corporation in the
best interests of all concerned," the Supreme Judicial Court of Massachusetts suggested a
balancing test. Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976).

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Following the lead of the Donahue court, several courts outsid

Massachusetts have also imposed a fiduciary duty running direc
from shareholder to shareholder in a close corporation.40
The development of the statutory and fiduciary duty acti
reflect "the same underlying concerns for the position of mino
shareholders, particularly in close corporations after harmon
longer reigns."41 Because of the similarities between the two rem
schemes, it has been suggested that "it makes sense to think of t
as two manifestations of a minority shareholder's cause of action
oppression."42 In the close corporation context, therefore, it is sensib
to view the parallel development of the statutory action and
fiduciary duty action as two sides of the same coin - i.e., t
shareholder's cause of action for oppression.
C. Measuring Oppression through "Reasonable Expectations"
The development of a shareholder's cause of action for

oppression requires courts to determine when "oppressive" conduct
has occurred. In wrestling with this issue, the courts have developed
three principal approaches to defining oppression. First, some courts
define oppression as "burdensome, harsh and wrongful conduct[,] . . .
a visible departure from the standards of fair dealing and a violation
of fair play on which every shareholder who entrusts his money to a
[corporation] is entitled to rely."43 Second, some courts link
oppression to the breach of a fiduciary duty owed directly from one
Under this test, if the controlling group can demonstrate a "legitimate business purpose" for its
actions, no breach of fiduciary duty will be found unless the minority shareholder can
demonstrate "that the same legitimate objective could have been achieved through an
alternative course of action less harmful to the minority's interest." Id.
40. See, e.g., Guy v. Duff & Phelps, Inc., 672 F. Supp. 1086, 1090 (N.D. 111. 1987) (discussing
the fiduciary duty that close corporation shareholders owe one another); Orchard v. Covelli, 590
F. Supp. 1548, 1556-59 (W.D. Pa. 1984) (same); W&W Equip. Co. v. Mink, 568 N.E.2d 564, 570-
71 (Ind. Ct. App. 1991) (same); Evans v. Blesi, 345 N.W.2d 775, 779 (Minn. Ct. App. 1984)
(same); Fought v. Morris, 543 So. 2d 167, 170-71 (Miss. 1989) (same); Crosby v. Beam, 548
N.E.2d 217, 220-21 (Ohio 1989) (same); Estate of Schroer v. Stamco Supply, Inc., 482 N.E.2d
975, 979-81 (Ohio Ct. App. 1984) (same).
41. Thompson, supra note 17, at 739.
42. Id. at 700. See generally id. at 738-45 (describing the "combined cause of action for
oppression").
43. Id. at 711-12 (omission in original) (quoting Fix v. Fix Material Co., 538 S.W.2d 351,
358 (Mo. Ct. App. 1976)); see, e.g., Skierka v. Skierka Bros., 629 P.2d 214, 221 (Mont. 1981)
(quoting Fix v. Fix Material Co., 538 S.W.2d 351, 358 (Mo. Ct. App. 1976)); see also
Haynsworth, supra note 35, at 36-39 (describing judicial definitions of oppression).

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close corporation shareholder to another.44 Th

tie oppression to the "frustration of the rea
the shareholders."45 Of these three appro
expectations" standard garners the most app
increasingly used it to determine whether
occurred.46 The highest courts in several s
reasonable expectations standard,47 and comm
favored it as well.48
The New York decision of In re Kemp & Be
particularly influential in giving some con
expectations framework. In In re Kemp, t
Appeals stated that "oppressive actions . . .
substantially defeats the 'reasonable expectat
44. See supra notes 37-40 and accompanying text (describin

that some courts have imposed).
45. 2 CLOSE CORPORATIONS, supra note 15, § 9.27, at 9-1
Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984) (equating oppression
'reasonable expectations' held by minority shareholders in co
particular enterprise").
46. See, e.g., 2 CLOSE CORPORATIONS, supra note 15, § 9.28
significant trends in the law of close corporations in recent year
courts to look to the reasonable expectations of shareholders to
or similar grounds exist as a justification for involuntary dissolu
47. See, e.g., Stefano v. Coppock, 705 P.2d 443, 446 n.3
reasonable expectations approach); Fox v. 7L Bar Ranch Co
1982) (same); Brenner v. Berkowitz, 634 A.2d 1019, 1029 (NJ.
N.E.2d at 1179 (same); Meiselman v. Meiselman, 307 S.E.2d
Balvik v. Sylvester, 411 N.W.2d 383, 388 (N.D. 1987) (same
S.E.2d 433, 442 (W. Va. 1980) (same). But see Kiriakides v. Atl
S.E.2d 257, 265-66 (S.C. 2001) ("We find [that] adoption o
standard is inconsistent with [the South Carolina oppression-
which places an emphasis not upon the minority's expectations b
majority."). A number of intermediate appellate courts in
reasonable expectations standard as well. See, e.g., Maschmeie
N.W.2d 377, 380 (Iowa Ct. App. 1988) (adopting the reaso
McCauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 237-
Davis v. Sheerin, 754 S.W.2d 375, 382 (Tex. App. 1988) (same).
48. See Haynsworth, supra note 35, at 37 ("The third defi
derived from English case law, and long advocated by Dean F
leading close corporation experts, is conduct which frustrates th
investors." (footnotes omitted)); Thompson, supra note 19
intimate, illiquid relationship within a close corporation th
foundation for judging whether relief should be granted and, if
shareholders' reasonable expectations has become the stand
approach.").
49. 473 N.E.2d 1173 (N.Y. 1984).

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shareholders in committing their capital to the particular

enterprise."50 As the court continued:
A court considering a petition alleging oppressive conduct must
investigate what the majority shareholders knew, or should have
known, to be the petitioner's expectations in entering the particular
enterprise. Majority conduct should not be deemed oppressive
simply because the petitioner's subjective hopes and desires in
joining the venture are not fulfilled. Disappointment alone should
not necessarily be equated with oppression.
Rather, oppression should be deemed to arise only when the

majority conduct substantially defeats expectations that, objectively
viewed, were both reasonable under the circumstances and were
central to the petitioner's decision to join the venture.51
... A shareholder who reasonably expected that ownership in the

corporation would entitle him or her to a job, a share of corporate
earnings, a place in corporate management, or some other form of
security, would be oppressed in a very real sense when others in the
corporation seek to defeat those expectations and there exists no
effective means of salvaging the investment.52
As illustrated by the In re Kemp court, the reasonable

expectations standard focuses primarily on the effect that majority
conduct has on the minority shareholder's interests. When majority
conduct unjustifiably53 harms a minority's reasonable expectations,
oppression liability is typically found.
50. Id. at 1179.

51. Id.
52. Id.; see also Meiselman, 307 S.E.2d at 563 ("[F]or plaintiff's expectatio
reasonable, they must be known to or assumed by the other shareholders and concu
them. Privately held expectations . . . not made known to the other participant
'reasonable.' Only expectations embodied in understandings, express or implied, am
participants should be recognized
the shareholder's expectations at the time of investment has be

See, e.g., Douglas K. Moll, Shareholder Oppression & Reasonab
Gifts, and Inheritances in Close Corporation Disputes, 86 MINN
reasonable expectations framework that focuses solely on the tim
overly restrictive. Instead . . . the framework should explicitly ad
looks for investment bargains between the shareholders thro
relationship.").
53. If the majority's allegedly oppressive action (e.g., t
employment) is justifiable in light of the minority's misconduct o
shareholder oppression is likely unwarranted. See Douglas K. M

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D. The Buyout Remedy for Oppression
Once reasonable expectations have been established, the

shareholder oppression doctrine protects those expectations through
a panoply of remedies. Many state statutes empower courts to offer a
wide range of relief,54 and judicial opinions frequently list various
remedial options.55 The most common remedy for oppression,
Close Corporations: The Unanswered Question of Perspective, 53 VAND. L. Rev. 749, 800-01,
813 (2000) (discussing minority misconduct or incompetence). Even if the minority has engaged
in wrongdoing, however, an excessive majority response should still result in oppression
liability. See Douglas K. Moll, Shareholder Oppression & Divided Policy in the Close
Corporation, 60 WASH. & LEE L. REV. 841, 881-88 (2003) (noting that, even if a minority
shareholder's misconduct or incompetence justifies the minority's termination from
employment, it does not necessarily follow that the minority may be excluded from the profit
distributions of the company).
54. See, e.g., MINN. STAT. Ann. § 302A.751 subd. 1-2 (West 2004) (authorizing "any
equitable relief and specifically authorizing a buyout of a shareholder's interest); N.J. STAT.
ANN. § 14A:12-7(1) (West 2003) (providing a nonexclusive list of possible relief that includes
the order of a buyout and the appointment of a provisional director or custodian).
55. The Supreme Court of Oregon, for example, listed the following "alternative remedies"
for oppressive conduct:
(a) The entry of an order requiring dissolution of the corporation at a specified future
date, to become effective only in the event that the stockholders fail to resolve their
differences prior to that date;
(b) The appointment of a receiver, not for the purposes of dissolution, but to continue
the operation of the corporation for the benefit of all the stockholders, both majority
and minority, until differences are resolved or "oppressive" conduct ceases;
(c) The appointment of a "special fiscal agent" to report to the court relating to the
continued operation of the corporation, as a protection to its minority stockholders,
and the retention of jurisdiction of the case by the court for that purpose;
(d) The retention of jurisdiction of the case by the court for the protection of the
minority stockholders without appointment of a receiver or "special fiscal agent";
(e) The ordering of an accounting by the majority in control of the corporation for
funds alleged to have been misappropriated;
(f) The issuance of an injunction to prohibit continuing acts of "oppressive" conduct
and which may include the reduction of salaries or bonus payments found to be
unjustified or excessive;
(g) The ordering of affirmative relief by the required declaration of a dividend or a
reduction and distribution of capital;
(h) The ordering of affirmative relief by the entry of an order requiring the
corporation or a majority of its stockholders to purchase the stock of the minority
stockholders at a price to be determined according to a specified formula or at a price
determined by the court to be a fair and reasonable price;
(i) The ordering of affirmative relief by the entry of an order permitting minority
stockholders to purchase additional stock under conditions specified by the court;
(j) An award of damages to minority stockholders as compensation for any injury
suffered by them as the result of "oppressive" conduct by the majority in control of
the corporation.

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however, is a buyout of the oppressed investor's stockholdings.56 A

buyout is advantageous because it provides a mechanism for an
oppressed shareholder to extricate his investment from a venture
without having to dissolve the corporation. The majority shareholder
continues to operate the close corporation and to participate in the
company's successes and failures, while the minority shareholde
recovers the value of his invested capital and removes himself from
the company's affairs.57
Support for the buyout remedy exists in a substantial number of
states, although the relevant statutes and judicial decisions differ i
their operation. In some states, statutes authorize a court to order
buyout as one of several possible remedies in dissolution proceeding
or in related shareholder litigation.58 In other states, the applicable
statutes authorize a buyout as part of an "election" procedure. Whe
a minority investor files a petition seeking involuntary dissolution of a
company, the statutes permit the corporation or the shareholders to
"elect" to purchase the petitioning investor's shares in order t
Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 395-96 (Or. 1973) (footnotes omitted
see also Brenner v. Berkowitz, 634 A.2d 1019, 1033 (NJ. 1993) ("Importantly, courts are not
limited to the statutory remedies [for oppression], but have a wide array of equitable remedies
available to them."). But see Giannotti v. Hamway, 387 S.E.2d 725, 733 (Va. 1990) (stating th
the dissolution remedy for oppression is "exclusive" and concluding that the trial court is no
permitted "to fashion other . . . equitable remedies").
56. See 1 CLOSE CORPORATIONS, supra note 15, § 1.16, at 1-97 (noting that buyouts "are
the most common remedy for dissension within a close corporation"); Murdock, supra note 29
at 470 ("The most common form of alternative remedy is the buy-out of the minority
shareholder."); Thompson, supra note 19, at 231 ("The increased use of buyouts as a remedy . .
is the most dramatic recent change in legislative and judicial thinking on close corporation
problems.").
57. See, e.g., Robert A. Ragazzo, Toward a Delaware Common Law of Closely Held
Corporations, 77 WASH. U. L.Q. 1099, 1119 (1999) ("[The buyout] is less harsh than dissolution
and often gives both parties what they want most. The majority gets to run the business as it
sees fit, unfettered by the continued participation of the minority, while, at the same time, the
minority receives the fair value of its investment." (footnotes omitted)); Sandra L. Schlafge,
Comment, Pedro v. Pedro: Consequences for Closely Held Corporations and the At-Will
Doctrine in Minnesota, 76 MINN. L. REV. 1071, 1080 n.46 (1992) ("[T]he buyout is the preferred
remedy for shareholder disputes because it allows a return of the shareholder's capital while not
crippling the business."); id. at 1093 ("[T]he statute provides for a buyout, which the Minnesota
Legislature described as the preferred remedy because it returns the shareholder's capital while
leaving the business entity intact.").
58. See, e.g., Ariz. Rev. Stat. Ann. § 10-1816 (West 2004) (authorizing a buyout); ME.
Rev. Stat. Ann. tit. 13-C, § 1434 (West Supp. 2003) (same); S.C. Code Ann. § 33-14-310(d)(4)
(Law. Co-op. 1990) (same); MODEL STATUTORY CLOSE CORP. SUPP. §§ 41, 42 (1997) (same).

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circumvent the dissolution proceeding.59

buyouts as part of their general equitab
absence of direct statutory support.60
II. "Fair Value" and the Problem of Discounts
A. The Ambiguity of "Fair Value "
When a majority shareholder is ordered (or elects) to bu

shares of an oppressed minority shareholder, the price a
buyout occurs is obviously of critical importance to bo
Typically, the buyout price is set at the "fair value" of the
shares. The Revised Model Business Corporation Act sp
possibility of a fair value buyout in an oppression dispute
buyout statutes in several of the large commercial states a
in terms of fair value.62 Even courts in jurisdictions without
authorization for a buyout have ordered buyouts at fair v
of their equitable authority.63
Although there is widespread support for a fair value b
possible oppression remedy, there is significant disagreem
what fair value means. Dissolution-for-oppression statutes
59. See, e.g., ALASKA STAT. § 10.06.630 (Michie 2002) (providing an electi
Cal. Corp. Code § 2000 (West 1990) (same); Minn. Stat. Ann. § 302A.751
2004) (same); N.J. STAT. ANN. § 14A:12-7(8) (West 2003) (same); N.Y. BU
§§ 1104-a, 1118 (McKinney 2003) (same); N.D. CENT. CODE § 10-19.1-115
MODEL BUS. CORP. ACT § 14.34, at 14-144 to 14-146 (2002) (same).
60. See, e.g., Orchard v. Covelli, 590 F. Supp. 1548, 1560 (W.D. Pa. 198
buyout); Davis v. Sheerin, 754 S.W.2d 375, 380, 383 (Tex. App. 1988) (same); Th
note 17, at 720-21 ("Courts increasingly have ordered buyouts of a shareholder's i
corporation or the other shareholders even in the absence of specific statutory au
61. See MODEL Bus. Corp. Act § 14.34(a) ("In a proceeding under secti
dissolve a corporation ... the corporation may elect or, if it fails to elect,
shareholders may elect to purchase all shares owned by the petitioning shareho
value of the shares." (emphasis added)); see also MODEL STATUTORY CLOS
§ 42(b)(l) (stating that a court, if it orders a share purchase, should "determine th
the shares, considering among other relevant evidence the going-concern
corporation").
62. See Thompson, supra note 17, at 718 (noting that "[sjeveral of the large
states permit a corporation or its majority shareholders to avoid involuntary
purchasing the shares of the petitioning shareholders at their 'fair value'"); infra
statutes).
63. See, e.g., Davis, 754 S.W.2d at 381 (stating, in a jurisdiction where there is no statutory
authorization for a buyout, that "[a]n ordered 'buy-out' of stock at its fair value is an especially
appropriate remedy in a closely-held corporation").

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2004] SHAREHOLDER OPPRESSION AND "FAIR VALUE'1 3 1 1
to define fair value.64 For example, New Jersey's statute uses the term
"fair value" repeatedly, but it neither provides a definition no
furnishes any guidance on how to apply the term.65 Many courts lo
to state appraisal statutes for interpretive aid, as those statutes allo
dissenting shareholders to receive the fair value of their shares upo
the occurrence of certain fundamental corporate changes, such
mergers.66 Unfortunately, most of the appraisal statutes also lack
substantive definitions of fair value.67
As a result of this lack of guidance, two conflicting positions have
developed on the meaning of fair value. The first position equates fa
value with "fair market value" and incorporates the discounts that
fair market value analysis would apply.68 A fair market value analys
determines the value of close corporation shares by asking wh
someone would hypothetically pay for those shares. More precisely
fair market value is defined as "the price at which property would
change hands between a willing buyer and a willing seller when
neither party is under an obligation to act."69 A willing an
64. See, e.g., MINN. STAT. ANN. § 302A.751 subd. 2 (West 2004) (providing for a fair valu
buyout, but failing to define "fair value"); NJ. STAT. ANN. § 14A:12-7(8) (West 2003) (sam
N.Y. Bus. Corp. Law §§ 1104-a, 1118 (McKinney 2003) (same); N.D. Cent. Code § 10-19
115 (2001) (same).
65. See NJ. Stat. Ann. § 14A:12-7(8).
66. See infra note 262 (discussing appraisal in the dissenters' rights context).
67. See John D. Emory, Jr., Comment, The Role of Discounts in Determining "Fair Value
Under Wisconsin's Dissenters' Rights Statutes: The Case for Discounts, 1995 WlS. L. REV. 115
1164 & n.51 (stating that "[t]he value standards as they relate to dissenters' appraisals in closely
held corporations . . . are clearly defined in the statutes of only two jurisdictions," and citi
California's "fair market value" standard and Ohio's "fair cash value" standard); see als
ROBERT F. REILLY & ROBERT P. SCHWEIHS, HANDBOOK OF ADVANCED BUSINESS
Valuation 301 (1998) (noting that "fair value is rarely legislatively defined").
68. In the appraisal context, the Supreme Court of Colorado observed the following:
Another interpretation of fair value is to value the dissenters' specific allotment of
shares, just as one would value the ownership of a commodity. Under this view . . . the
"fair value" of [an] ownership interest is only the amount a willing buyer would pay
to acquire the shares. In effect, this interpretation reads fair value as synonymous
with fair market value. An investor who wants to buy a minority allotment of shares
in a closely-held corporation would discount the price he was otherwise willing to pay
for the shares because the shares are a minority interest in the company and are a
relatively illiquid investment. Likewise, under this interpretation, the trial court
should usually apply minority and marketability discounts.
Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 360 (Colo. 2003); see id. at 361 ("Under a
fair market value standard a marketability discount should be applied because the court is, by
definition, determining the price at which a specific allotment of shares would change hands
between a willing buyer and a willing seller.").
69. Id. at 362; see also REILLY & SCHWEIHS, supra note 67, at 302 (defining fair market
value as "[t]he amount at which the property would change hands between a willing buyer and a

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noncompelled buyer would generally pay

possessed value-enhancing attributes (e.g., co
for shares that lacked such features.70 To reflec
it is fairly standard for a fair market value
"discount" the purchase price of shares tha
valuable attributes.71 Because the share
corporation minority investor are characteriz
and by a lack of liquidity,72 one can expect t
those shares to be lower than shares that pos
court accepts that fair value is equivalent
discounting the buyout price of shares fo
enhancing attributes is appropriate.74
The second position on the meaning of f
value with "enterprise value." The enterprise
oppressed shareholder in a buyout setting as
relinquish his ownership position, rather tha
to sell his shares.75 Such an approach assu
oppressive conduct, the investor would have
position in the corporation and would have c
willing seller when the former is not under compulsion to buy

compulsion to sell, both parties having reasonable knowledge of
Rul. 59-60, 1959-1 C.B. 237)).
70. See infra note 73 and accompanying text (noting that cl
will have a lower value to purchasers because the shares lack con
71. See REILLY & SCHWEIHS, supra note 67, at 303 (noting t
'willing buyer, willing seller' concept that defines fair market v
72. By definition, a "minority" shareholder lacks sufficien
operations of the firm. See supra note 2 (defining a "minorit
corporation lacks an established market such that close corpora
into cash (i.e., close corporation stock is not easily liquida
accompanying text (discussing the absence of a market for clos
73. See, e.g., Pueblo Bancorporation, 63 P.3d at 360 ("An
minority allotment of shares in a closely-held corporation w
otherwise willing to pay for the shares because the shares are a
and are a relatively illiquid investment.").
74. See supra note 68 and accompanying text (equating "
value"); see also Pueblo Bancorporation, 63 P.3d at 362 ("[I]n a
marketability discount [one] is, in effect, urging an inter
synonymous with 'fair market value.'"); cf. ROBERT W. HAMILTON, BUSINESS
Organizations: Unincorporated Businesses and Closely Held Corporations
§ 14.6, at 405-06 (observing that "fair value" has no inherent meaning and
merely a synonym "for the basic definition of value, namely the price on w
and willing seller agree").
75. See infra Part III. A.I. a (explaining that a buyout in the oppressi
equivalent to a voluntary sale).

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benefits of owning a stake in the overall enterprise.76 Under this

position, the value of close corporation shares is determined not by
referencing what the particular shares would fetch in a hypothetica
market sale, but instead by valuing the company as a whole and by
ascribing to each share its pro rata portion of that overall enterprise
value.77 Viewed in this manner, the specific shares of, for example,
25 percent minority investor are not valued in and of themselves.
Instead, they are valued solely as a part (25 percent) of the overall
value of the close corporation as an operating business, with n
discounting for the shares' lack of particular features.78
To distinguish these two positions on the meaning of fair value, a
brief illustration is helpful. Assume that a close corporation is valued
on a going-concern basis79 at $10 million. Assume further that a cour
is valuing the shares of a 25 percent minority investor in a buyout
proceeding. Under an enterprise value approach, a 25 percent
ownership stake in a $10 million company would be valued on a pro
rata basis at $2.5 million. Under a fair market value approach,
however, a court would discount that $2.5 million amount to reflec
(1) that a purchaser would pay less for a minority block of stoc
because it lacks control (the minority discount),80 and (2) that
purchaser would pay less for a block of close corporation stock
76. See infra notes 110-13 and accompanying text (noting that, in the absence o
oppression, a close corporation shareholder could have maintained his investment and earne
his proportional share of the company's going-concern value).
77. As the Supreme Court of Colorado observed:
One possible interpretation ... is that fair value requires the court to value the
dissenting shares by looking at what they represent: the ownership of a certain
percentage of the corporation. In this case, the trial court found that Holding
Company, as an entity, was worth $76.1 million. Lindoe owned 5.71 percent of
Holding Company and therefore, under this view, Lindoe is entitled to 5.71 percent of
Holding Company's value, or just over $4.3 million. Because the proper measure of
value is the shareholder's proportionate interest in the value of the entity, discounts
at the shareholder level are inapplicable.
Pueblo Bancorporation, 63 P.3d at 360; see also Cavalier Oil Corp. v. Harnett, 564 A.2d 1137,
1146 (Del. 1989) (noting that one "rationale for rejection of the minority discount is that th
valuation focus is limited to the company level and does not involve the size of a particular
shareholder's interest").
78. See supra note 77 and accompanying text (describing the enterprise value approach).
79. Value as a "going concern" is defined as "[v]alue in continued use, as a mass
assemblage of income producing assets, and as a going-concern business enterprise." SHANNO
P. Pratt et al., Valuing a Business: The Analysis and Appraisal of Closely Held
COMPANIES 29 (3d ed. 1996); see also Edwin T. Hood et al., Valuation of Closely Held Business
Interests, 65 UMKC L. Rev. 399, 411 (1997) (describing going-concern value as when "the assets
[are] valued as an operating unit").
80. See infra Part II.B (describing the minority discount).

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because it cannot easily be sold (the marketab

combined effect of these discounts reduced t
by 40 percent,82 the buyout price would decr
valuation difference between the two approac
amount of the discounts.
As the above discussion reveals, it is the ambiguity in the

meaning of fair value that sets the stage for the thorny problem of
discounts.83 Under the fair market value approach, discounts are
appropriate given that the fair value analysis focuses on the particular
characteristics of the shares to be purchased in a buyout.84 Under the
enterprise value approach, discounts are inappropriate because the
fair value analysis focuses on appraising the company as a whole. The
specific shares to be purchased in the buyout are relevant only to the
extent that they represent the percentage of ownership in the
enterprise that the minority has been forced to relinquish.85 Before
plunging into the debate over discounts, some additional detail on the
discounts themselves is needed.86
81. See infra Part II.C (describing the marketability discount).

82. Empirical data suggest that the combined effect of these discounts may be even greater
than 40 percent. See infra note 97 (discussing the combined effect of the minority discount and
the marketability discount). It should also be noted that when both minority and marketability
discounts are applicable, the discounts are taken sequentially such that they do not have an
additive effect. See infra note 97 (providing an example of the proper application of the
discounts).
83. See Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144 (Del. 1989) (describing two
possible positions on calculating fair value in an appraisal proceeding: (1) "value the corporation
itself," or (2) value "a specific fraction of its shares as they may exist in the hands of a particular
shareholder" (quoting the Vice Chancellor of the Delaware Court of Chancery); supra notes
68-78 and accompanying text (discussing the ambiguity in the meaning of "fair value"); cf.
MOD. BUS. CORP. ACT § 13.01(4)(iii) & cmt. 2 (2002) (discussing fair value under the appraisal
statute and referring to "the more modern view that appraisal should generally award a
shareholder his or her proportional interest in the corporation after valuing the corporation as a
whole, rather than [awarding] the value of the shareholder's shares when valued alone").
84. Stated differently, the fair market value approach posits that when the shares of
oppressed minority investors are bought out, either by election or by court order, the lack of
control and the absence of liquidity associated with the shares should decrease the buyout price.
See supra notes 68-74 and accompanying text (describing the fair market value approach).
85. The enterprise value approach, in other words, focuses the fair value inquiry on a pro
rata share of the company's overall value, rather than on the traits of the specific shares to be
purchased. See supra notes 75-78 and accompanying text (describing the enterprise value
approach).
86. Courts historically found the meaning of fair value to be ambiguous at another level -
i.e., whether a fair value buyout contemplated valuation on a liquidation basis or on a going-
concern basis. For example, California's buyout statute mentions that fair value shall be
determined on the basis of liquidation value as of the valuation date, although the same statute

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B. The Minority Discount

By definition, a minority interest in a business entity lacks
sufficient voting power to independently control the operations of the
firm.87 Because of its lack of voting power, a minority interest is les
valuable than a controlling interest. Indeed, a minority "discount"
reflects the simple fact that "investors value the ability to direc
management and thus would not be willing to pay as much for share
on a minority basis as they would for shares that convey a controllin
notes that the possibility of selling the company as a going concern should also be taken int
account. See Cal. Corp. Code § 2000(a) (West 1990) ("The fair value shall be determined on
the basis of the liquidation value as of the valuation date but taking into account the possibility,
if any, of sale of the entire business as a going concern in a liquidation."). On the other hand
the Model Statutory Close Corporation Supplement defines fair value with reference to going
concern value. See, e.g., MODEL Stat. Close CORP. Supp. §42(b)(l) (1997) (stating that
court, if it orders a share purchase, should "determine the fair value of the shares, considering
among other relevant evidence the going concern value of the corporation").
By and large, courts now generally agree that fair value is to be measured on a going-
concern basis so long as the close corporation at issue is not dissolving. See, e.g., Advance
Communication Design, Inc. v. Follett, 615 N.W.2d 285, 290 (Minn. 2000) ("We conclude that
fair value, in ordering a buy-out under the Minnesota Business Corporations Act, means the pro
rata share of the value of the corporation as a going concern."); Blake v. Blake Agency, Inc.
486 N.Y.S.2d 341, 347 (App. Div. 1985) ("The [fair] value of the corporation should be
determined on the basis of what a willing purchaser, in an arm's length transaction, would offe
for the corporation as an operating business, rather than as a business in the process o
liquidation . . . ."); see also James H. Eggart, Note, Replacing the Sword with a Scalpel: The Ca
for a Bright-Line Rule Disallowing the Application of Lack of Marketability Discounts in
Shareholder Oppression Cases, 44 ARIZ. L. REV. 213, 219 (2002) (noting that "there is genera
consensus that 'fair value' is the value of the oppressed shareholder's proportionate interest i
the corporation as a going concern, rather than its liquidation value"). Moreover, of the various
going-concern valuation techniques, the fair value of a close corporation is most commonly
derived by calculating investment value - a calculation that is usually based upon the earnings of
the corporation. See Thompson, supra note 19, at 233 ("The most common method for
determining fair value is to calculate investment value, usually based on the company'
earnings."); id. ("[T]he most commonly utilized formula [for calculating investment value] treats
company earnings as determinant of investment value."). Net asset value and market value "ar
of little use in determining the fair value of an interest in an ongoing close corporation; net asse
value is generally used when an enterprise is liquidating, and market value is not availab
because a close corporation by definition lacks a market for its shares." 2 CLOSE
CORPORATIONS, supra note 15, § 9.32, at 9-190; see, e.g., Taines v. Gene Barry One Hour Phot
Process, Inc., 474 N.Y.S.2d 362, 366-67 (Sup. Ct. 1983) (rejecting net asset value and marke
value as methods for close corporation valuation proceedings).
87. See, e.g., Emory, supra note 67, at 1160 ("Minority interests lack the power o
controlling interests to dictate corporate management and policies."); Hetherington & Dooley
supra note 2, at 5 n.7 (defining a "minority" shareholder as a shareholder "who [does no
possess the actual power to control the operations of the firm").

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interest."88 Stated differently, a minority d

"investors will pay less for [a minority stak
because of the inability to elect a sufficient
control management."89
Empirical data "suggest an average minorit
29-33% off the value of controlling shares
impact of a minority discount on the amoun
quite significant.
C. The Marketability Discount
Close corporation shares are not traded on

a result, it is considerably more difficult to sell
than public corporation stock.92 Factors contrib
include the greater time and expense assoc
corporation shares and the smaller pool of po
investments.93 The marketability disco
88. Emory, supra note 67, at 1160; see, e.g., Pratt et AL., su
"a minority interest discount reflects a value decrement due
(observing that a minority discount is based on a lack of contro
89. Steven C. Bahls, Resolving Shareholder Dissension: S
Equitable Remedy, 15 J. CORP. L. 285, 301 (1990); see also Harry
Business Interests, 33 MERCER L. REV. 457, 492-93 (1982) ("A
held corporation is willing to pay more for a majority interest i
interest because of the ability to maintain voting control
directors.").
90. Emory, supra note 67, at 1161; see SHANNON P. PRATT ET AL., VALUING SMALL
Businesses and Professional Practices 438 (3d ed. 1998) (citing empirical data from 1980
to 1996 indicating that minority discounts average between 26 and 33 percent).
91. See supra notes 31-32 and accompanying text (discussing the lack of a market for close
corporation shares).
92. See, e.g., Emory, supra note 67, at 1161 ("It is much more difficult to liquidate (quickly
sell for cash) a minority interest in a closely held corporation than a minority interest in a
publicly traded corporation."); infra notes 93-95 and accompanying text (discussing the
difficulties associated with selling close corporation stock).
93. As commentators observe:
In the U.S. public markets, a security holder is able to sell a security over the
telephone in seconds, usually at or within a small fraction of a percent of the last price
at which the security traded, with a very small commission cost, and receive the cash
proceeds within three working days.
By contrast, the universe of realistically potential buyers for most closely held
minority ownership securities is an infinitesimally small fraction of the universe of
potential buyers for publicly traded securities. In any case, it is illegal for a person or
company to sell privately held securities to the general public without a registration
with either the SEC or the state corporation commission, an expensive and time-
consuming process. Furthermore, a minority stockholder cannot register stock for
public trading; only the company can register its stock for public trading.

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recognition of these factors and the accompanying reality tha

investors will generally pay less for close corporation shares becaus
of the shares' relative illiquidity.94 As one noted valuation authority
observes:
The market for securities in the United States is the most liquid
market for any kind of property anywhere in the world. This is one
of the major reasons companies are able to raise investment capital
from both institutional and individual investors: the ability to
liquidate the investment immediately, at little cost, and with virtual
certainty as to realization of the widely publicized market price.
Empirical evidence demonstrates that investors are willing to pay a
high premium for this level of liquidity, or, conversely, extract a high
discount relative to actively traded securities for stocks or other
investment interests that lack this high degree of liquidity.95
Empirical data "indicate that the discount for the lack of

marketability factor alone averages between thirty-five and fifty
percent."96 By itself, therefore, the marketability discount can have a
Besides the problems of actually trying to sell the stock (and because of them), the
liquidity of closely held stock is further impaired by banks and other lending
institutions' unwillingness to accept it as loan collateral - as they would accept public
stock.
PRATT ET AL., supra note 79, at 334.

94. See supra notes 71-74 and accompanying text (discussing, inter alia, the problem of
illiquidity and why this problem may warrant a discount); infra note 95 and accompanying text
(explaining the basis for the marketability discount).
95. PRATT ET AL., supra note 79, at 333; see, e.g., Pueblo Bancorporation v. Lindoe, Inc., 63
P.3d 353, 357 n.2 (Colo. 2003) ("A marketability discount adjusts the value of specific shares to
reflect the fact that there is no ready trading market for the shares."); id. ("Because there are a
small number of potential buyers of closely-held corporate stock, a shareholder may be unable
to secure a willing buyer if he decides to cash out of his investment."); Advanced
Communication Design, Inc. v. Follett, 615 N.W.2d 285, 291 (Minn. 2000) ("[S]hares in a closely
held corporation cannot be sold as readily as shares in a corporation with securities traded over
an exchange or in an established market and therefore investors tend to pay less, and sometimes
significantly less, for such shares."); id. ("A marketability discount 'adjusts for a lack of liquidity
in one's interest in an entity' and should be distinguished from a minority discount, which
adjusts for lack of control of the corporation." (quoting Balsamides v. Protameen Chems., Inc.,
743 A.2d 721, 733 (N.J. 1999))); Bahls, supra note 89, at 302 (noting that a marketability
discount is often imposed because "investors are not willing to pay as much for close
corporation stock" given the "difficulty and expense associated with selling the stock at a later
date").
96. Emory, supra note 67, at 1161; see Pratt ET AL., supra note 79, at 334 (noting the
"extreme contrasts between the ability to sell or hypothecate closely held minority stock as
compared with publicly traded stock," and stating that "empirical evidence . . . suggests that
discounts for lack of marketability for minority interest closely held stocks tend to cluster in the
range of 35 to 50 percent from their publicly traded counterparts"); see also Haynsworth, supra

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dramatic effect on the amount of compensat

award. When both marketability and minori
to a buyout award, the effect is even more seve
III. Building the Case against Discounts
A. Strengths of the Case
Minority and marketability discounts have no place in

shareholder oppression disputes. The shareholder oppression context
is unsuited to discounts, and the statutory language in many states
suggests that discounts are inapplicable. In addition, the
undercompensatory nature of the buyout award signals that discounts
should be avoided. Consequently, courts should adopt an enterprise
value interpretation of fair value and should reject a fair market value
approach.
note 89, at 490 ("[S]ome authorities have advocated that discounts of as high as fifty to seventy-
five percent for lack of marketability in closely held companies should be accepted.").
97. See, e.g., Emory, supra note 67, at 1162 ("Taken together, marketability and minority
discounts often reduce the fair market value of minority shares to well under half the value of
controlling shares in the same corporation."); Murdock, supra note 29, at 479 ("The cumulative
effect of these [minority and marketability] discounts can reduce the value of the minority
shares by fifty percent or more."); id. at 489 (observing that minority and marketability
discounts "can have a dramatic and devastating impact on the value of minority interests").
When both minority and marketability discounts are at issue, it is important to note that
the discounts are applied in a sequential, nonadditive manner. See Pratt et al., supra note 79,
at 314 (providing an illustration of how multiple discounts affect a valuation). Assuming a
$2,500,000 proportionate ownership stake in a company, a 40 percent minority discount, and a
40 percent marketability discount, a court should apply the minority discount first. This would
reduce the buyout award to $1,500,000 (.6 x 2,500,000). A court should then apply the 40
percent marketability discount to this net amount, further reducing the buyout award to
$900,000 (.6 x 1,500,000). As commentators explain:
[T]his discounting from control value usually is done as a two-step process, first for
minority interest, then for marketability
minority interest and marketability are multiplicative .

discounts are taken in chain. The discount for minority int
discount for lack of marketability is taken from the net
interest discount. Thus, the total of the two 40 percent di
but 64 percent ....
Id. at 314; see also id. (explaining the rationale for the sequen
referring to "the conceptual preference for distinguishing
interest and the discount for lack of marketability," an
importantly, for most types of companies and ownership int
is available for quantifying each of the two discounts taken o
them together").

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1. Context Matters. Valuation is inherently contextual.98 Setting

and circumstances matter greatly, as they can significantly affect the
value of a particular asset. The same automobile, for example, can
have divergent values depending on the context in which it is
appraised (e.g., retail sale, wholesale sale, or dealer trade-in).99 In this
regard, shares of close corporation stock are no different from any
other asset. To appropriately determine the fair value of a minority
investor's shares, a court needs to be mindful of the context in which
the fair value inquiry is made. When that context is a buyout
proceeding in an oppression setting, minority and marketability
discounts are inappropriate, as the forced-sale nature of the buyout
proceeding and the identity of the purchasers involved weigh heavily
against the application of discounts.
a. The "Sale" Misnomer. The central problem in equating fair

value with fair market value is that the conditions assumed in a fair
market value appraisal are not actually present in an oppression
setting. A fair market value appraisal assumes the presence of a
willing seller and a willing buyer who are under no obligation to act.100
That description utterly fails to reflect the actual circumstances
surrounding buyouts in the oppression context. A willing, no-
obligation seller contemplates a person who voluntarily offers to
98. See, e.g., MODEL Bus. CORP. ACT § 13.01 cmt. 2 (2002) ("[Different transactions and
different contexts may warrant different valuation methodologies."); 2 Am. Law Inst.,
Principles of Corp. Governance: Analysis and Recommendations § 7.22(a) (1994)
(stating that fair value "should be determined ... in the context of the transaction giving rise to
appraisal"); PRATT ET AL., supra note 79, at 22 ("No single valuation method is universally
applicable to all appraisal purposes. The context in which the appraisal is to be used is a critical
factor."); id. at 23 ("The word value means different things to different people. Even to the
same person, value means different things in different contexts . . . ."); id. at 27 ("To understand
what the expression fair value means, you have to know the context of its use."); Richard A.
Booth, Minority Discounts and Control Premiums in Appraisal Proceedings, 57 BUS. LAW. 127,
156 (2001) (noting that "the standard of value in an appraisal proceeding should reflect the
actual transaction under review"); see also PRATT ET AL., supra note 79, at 15 ("Many people
hold the mistaken notion that there can be only one 'value.' . . . [T]here are many definitions of
value, and the purpose of the appraisal usually determines the appropriate definition of
value."); id. at 22 ("Many business appraisals fail to reach a number representing the
appropriate definition of value because the appraiser failed to match the valuation methods to
the purpose for which it was being performed." (emphasis removed)); id. at 23 ("The purpose of
the valuation often determines the applicable standard of value - that is, the definition of value
being sought - and almost always influences it.").
99. Cf. Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 960-65 (1997) (holding that the
Bankruptcy Code mandates valuing a truck at replacement value rather than foreclosure value).
100. See supra note 69 and accompanying text (defining fair market value).

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sell - i.e., a person selling because he want

has to do so. The seller in a buyout setting
aggrieved minority shareholder who, on
have preferred to remain a shareholder in
oppressive conduct.101 Stated differently, it
forces the minority to seek an exit from t
leading to the buyout "sale" stems from th
nonelection cases, from the court's agreem
conditions in the company have become in
the minority's shares on the basis of a hyp
sense when the minority investor was not
place.
The fair market value concept of willing, noncompelled parties is
also a poor fit with respect to the buyer. The buyer in an oppression
lawsuit is typically the oppressive majority shareholder who has been
ordered by the court to purchase the shares of the aggrieved minority
investor.103 A purchase dictated by judicial order, of course, is far from
the willing, no-obligation-to-act assumption of the fair market value
standard.104
Even when a majority shareholder elects to purchase the

holdings of a complaining minority shareholder,105 the election is still
less "willing" and more "compelled" than the hypothetical purchaser
101. Indeed, stock ownership in a successful close corporation typically provides a

shareholder with a number of employment and management benefits that are difficult to obtain
elsewhere. See infra notes 172-76 and accompanying text (describing the benefits of close
corporation employment and management). Given these benefits, close corporation
shareholders are often reluctant to sell their holdings unless, because of oppressive conduct,
they are forced to do so. Cf. Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989)
("Where there is no objective market data available, the appraisal process is not intended to
reconstruct a pro forma sale but to assume that the shareholder was willing to maintain his
investment position, however slight, had the merger not occurred."); Prentiss v. Wesspur, Inc.,
No. 36321-2-1, 1997 WL 207971, at *3 (Wash. Ct. App. Apr. 28, 1997) ("The process of appraisal
consequently assumes that the shareholder was willing to maintain the investment position,
rather than assuming that the ownership interest would be sold subject to the market's
vissitudes [sic].").
102. See, e.g., Murdock, supra note 29, at 487 (describing a buyout as a "forced sale" because
"those in control have 'made it no longer tolerable for [the minority] to retain his interest in the
company'" (quoting In re Bird Precision Bellows Ltd., [1984] Ch. 419, 430, affd, [1986] 2 W.L.R.
158)).
103. The purchaser in an oppression lawsuit is almost always the oppressive majority
shareholder or the corporation itself. See infra note 119 and accompanying text (discussing the
typical purchaser).
104. See supra note 69 and accompanying text (defining fair market value).
105. See supra note 59 and accompanying text (discussing election statutes).

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contemplated by the fair market value approach. The hypotheti

purchaser chooses to buy only if the price is acceptable and suffer
negative repercussions if the purchase fails to occur. This descript
however, does not match the oppression context. Once an oppre
majority elects to purchase the minority's shares, the majori
bound to purchase them even if he later disagrees with the price
by the court.106 Further, at least in some situations, the majority ele
to purchase the minority investor's shares to avoid the possibili
however slight, of a court-ordered dissolution of the corporation
Unlike the hypothetical purchaser, therefore, the specter of neg
consequences does exist (i.e., dissolution) if the purchase of
minority's shares is not accomplished. Thus, regardless of wheth
buyout is ordered or elected, a buyout in the oppression context
not involve a purchaser with the same degree of willingness and "
choice" that fair market value contemplates.
From the above discussion, it should be clear that the "volunt
sale" model contemplated by the fair market value approach is a
fit in the oppression context. The oppressed minority investor wa
looking to sell, and the oppressive majority investor, absent the th
of dissolution or other judicial sanction, was not looking to buy
106. See, e.g., N.Y. BUS. CORP. LAW § 1118(a) (McKinney 2003) ("An election pursua
this section shall be irrevocable unless the court, in its discretion, for just and equ
considerations, determines that such election be revocable."); MOD. BUS. CORP. ACT § 14
(2002) ("An election pursuant to this section shall be irrevocable unless the court deter
that it is equitable to set aside or modify the election.").
107. See, e.g., In re Seagroatt Floral Co., 583 N.E.2d 287, 289-90 (N.Y. 1991) (noting th
purpose of the buyout election statute was to provide shareholders with the ability to cont
the business and to avoid any risk of dissolution); see also infra notes 283-85 and accompany
text (discussing the purpose of buyout election statutes and noting that the statutes e
shareholders to continue a company as a going concern).
108. See, e.g., McKesson Corp. v. Islamic Republic of Iran, 116 F. Supp. 2d 13, 37 (D
2000) ("[I]n a forced sale, discounts are inherently unfair to the forced-out shareholder who
not pick the timing of the transaction and thus is not in the position of a willing seller."),
sub nom. McKesson HBOC, Inc. v. Islamic Republic of Iran, 271 F.3d 1101 (D.C. Cir. 2
Hendley v. Lee, 676 F. Supp. 1317, 1330 (D.S.C. 1987) ("Discounts properly apply to the t
value of the company in a 'willing buyer/willing seller' context, but do not apply at all
neither party is willing and the transaction is between insiders."); Pooley v. Mankato I
Metal, Inc., 513 N.W.2d 834, 838 (Minn. Ct. App. 1994) ("[B]ecause appellant [an opp
minority shareholder] is an unwilling vendor of his shares in [the close corporation,] we ho
trial court properly exercised its discretion in not reducing appellant's shares' valu
minority discount."); Hansen v. 75 Ranch Co., 957 P.2d 32, 41 (Mont. 1998) ("[Discounts
shareholder level are inherently unfair to the minority shareholder who did not pick the t
of the transaction and is not in the position of a willing seller."); Chiles v. Robertson, 76
903, 926 (Or. Ct. App. 1989) ("This is not a sale by a willing seller to a willing buyer
defendants should not benefit from reductions in value that are based on such a sale."); id.

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Instead of a voluntary sale conception, it

characterize an oppression buyout as a compe
minority's ownership position. The oppressive
minority to relinquish his investment, and a c
dissolution) has forced the majority to "cash
The buyout, in other words, should be vie
which the majority compensates the minority
the minority has unwillingly surrendered.10
investment that the buyout proceeding should
What, then, is the value of the investmen
shareholder has relinquished? It is, at a mini
pro rata portion of the company's overall
business.110 A minority investor owning 33 p
require defendants to purchase plaintiffs' interests because of t

The purchase is a judicial remedy to compensate plaintiffs
defendants' wrongs, not a market transaction."); Prentiss v. W
WL 207971, at *3 (Wash. Ct. App. Apr. 28, 1997) ("Whether
owner's purchase, the minority shareholder is not selling on the
impose a discount in the face of a majority owner's miscondu
Lindoe, Inc., 63 P.3d 353, 361 (Colo. 2003) ("[I]n a dissenter
shareholder is not in the same position as a willing seller on the
seller with little or no bargaining power."); Haynsworth, supra
applying these discount variables is to determine the investmen
minority interest in the context of a hypothetical sale betw
situation that does not exist in the dissenting shareholder situat
109. Cf Pueblo Bancorporation, 63 P.3d at 364 ("The purp
statute would best be fulfilled through an interpretation of 'fai
shareholders are compensated for what they have lost, that i
interest in a going concern."); Tri-Cont'l Corp. v. Battye, 74 A.2
"[t]he basic concept of value under the appraisal statute is that
paid for that which has been taken from him, viz., his proportio
and observing that "[b]y value of the stockholder's proportio
enterprise is meant the true or intrinsic value of his stock whic
Chicago Corp. v. Munds, 172 A. 452, 455 (Del. Ch. 1934) (notin
"[w]hat [a dissenting shareholder] has been deprived of is his
enterprise which but for the compulsion of others he could con
indefinite future," and stating that "[w]hat he is deprived of
Woodward v. Quigley, 133 N.W.2d 38, 43^4 (Iowa 1965) ("Th
the appraisal statute is that the stockholder is entitled to be pai
from him, viz., his proportionate interest in a going concern."
at 72)).
110. See supra note 109 (observing that a shareholder has relinquished his proportionate
interest in a going concern). It is important to note that the value of the investment relinquished
by the oppressed shareholder may equate to more than a pro rata share of the company's
overall value. See infra notes 169-71 and accompanying text (indicating that a close corporation
investment is valuable not only because it conveys a proportionate interest in a going concern,
but also because it typically includes employment and management benefits).

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relinquishing a 33 percent claim on the overall worth of that

company. The dollar amount of the claim is what the investor coul
have received over time by remaining a shareholder in the business.11
Indeed, it is not accurate to maintain, as discount proponents often
do, that minority shareholders can only realize the value of thei
shares by selling them independently to a third party.112 In the absence
of oppression, a close corporation shareholder can expect to receive
over time, his percentage share of the company's value through
dividends, salary, acquisition consideration, and/or other
distributions.113 In a merger, for example, a 33 percent shareholder
would receive 33 percent of the total price paid for the company - a
price that should reflect the overall value of the business. Assuming
no oppressive conduct, therefore, an aggrieved shareholder could
have maintained his investment and earned his proportional share of
the company's going-concern value. When forced to relinquish that
investment because of oppressive conditions, the shareholder should
receive compensation for what has been taken - the right to receive a
pro rata portion of the company's overall value.114
111. See N. Trust Co. v. Comm'r, 87 T.C. 349, 365 (1986) ("This [discounted cash flow]
valuation method is based on the assumption that the price an investor will pay for a share of
stock is the present value of the future stream of income he expects to receive from the
investment:' (emphasis added)); see also JAMES D. Cox ET AL., SECURITIES REGULATION:
CASES & MATERIALS 28-29 (3d ed. 2001) (observing that the present value of a share of stock is
based on "the future payouts of a corporation to its shareholders" (emphasis added)); Hood et
al., supra note 79, at 417-18 (noting that the discounted cash flow method of valuation is based
on "the actual cash produced by a business and returned to the investor" (emphasis added));
supra note 109 (indicating that when a shareholder relinquishes his ownership stake, he is giving
up a proportionate interest in a going concern).
112. Cf. Emory, supra note 67, at 1171-72 (noting, in the appraisal context, that "[a]dvocates
of discounts . . . point to the fact that ordinarily the only way for minority shareholders to realize
the value of their shares is to sell them at market prices").
113. Cf. Murdock, supra note 29, at 487 ("Were the minority shareholder not being
squeezed-out or frozen-out, he or she would have the right to continue to enjoy the perquisites
of employment, which as previously discussed are most valuable, or to await a more beneficial
price from a third party." (footnote omitted)).
114. This same argument can be made in a slightly different manner. Broadly speaking, an
investor has two options as a shareholder in a close corporation. First, assuming compliance
with any stock transfer restrictions, the investor may attempt to sell his holdings at any time. In
the absence of exigent circumstances, the investor would presumably sell only when conditions
were advantageous (e.g., when the company's future prospects were favorable). Second, the
investor can maintain his holdings and share in the going-concern value of the venture through
dividends, salary, or the possible sale of the company. Significantly, the investor retains
discretion to pursue either option.
Oppressive conduct by the majority shareholder, however, can force a minority investor's
hand. Indeed, oppressive conduct may make the second "hold" option an impossibility, as the

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In short, valuing a minority's investmen

context is very different from valuing a min
forced redemption context. In a voluntary sa
from the perspective of outsiders - i.e., what
Because the absence of control and the lack of
variables to outsiders, those factors are rele
inquiry.115 In a forced redemption, however
majority's oppressive acts frequently prevent the minority f

company. The minority may be forced to seek a "sale" of
intervention, even when conditions for such a "sale" are not ot
company's earnings have declined due to an economic recessio
Because the majority's oppressive conduct has eliminated
choose the "sale" or "hold" option that he prefers, one could
compensate the oppressed minority for whichever option
discounts are associated with the "sale" option, the minority
valuation that would provide undiscounted compensation for
of the company's going-concern value. Professor Murdock has e
[T]he acts of those in control, by squeezing-out or fre
shareholders, have abrogated the right of such minority s
hold such shares and to await a more favorable sale opport
has determined when the minority must sell, the majori
rewarded by acquiring such shares at a discount.
Were the minority shareholder not being squeezed-out o

would have the right to continue to enjoy the perquisites
previously discussed are most valuable, or to await a mor
third party. . . .
The action of those in control, by setting in motion event

out of the minority (thereby providing liquidity), forecl
participating in any future growth or future advantageous s
to alienate these shares more advantageously, it would
discount minority shares for lack of alienability when the ma
a buy-out have created a market now but foreclosed t
attractive market later.
Murdock, supra note 29, at 487-88 (emphasis removed) (footnote omitted); see also Kellogg v.
Ga.-Pac. Paper Corp., 227 F. Supp. 719, 724 (W.D. Ark. 1964) (noting that minority
shareholders have an "interest in an existing business with its attendant possibilities of growth
and appreciation in value, an interest which may be worth much more than the present cash
value of the minority shares").
115. Even when the valuation focus is from the perspective of outsiders - i.e., what will a
third party pay - it is not entirely clear that discounts would be applicable. The issue turns on a
court's view of what is being paid for. If a court asks what a third party will pay for the entire
company, the inquiry is similar to an enterprise value approach. The minority shareholder will
receive a pro rata share of that company value. Alternatively, if a court asks what a third party
will pay for the minority's specific shares, the inquiry is similar to a fair market value approach,
and discounts are likely to be applied. See Barry M. Wertheimer, The Shareholders' Appraisal
Remedy and How Courts Determine Fair Value, 47 DUKE LJ. 613, 666 (1998) (contrasting the
third-party sales value of a corporation as a whole with the third-party sales value of a minority
block of stock).

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from the perspective of the one being redeemed - i.e., what has
minority given up?116 In this setting, factors significant to outsider
irrelevant.117 The proper interpretation of fair value for an oppressi
buyout is the interpretation that most closely matches the
circumstances that are present in an oppression setting. Because a
buyout of the typical oppressed shareholder resembles a forced
redemption far more than it resembles a voluntary sale, the fair
market value standard should be rejected. By providing an oppressed
investor with his pro rata share of the company's overall worth, the
enterprise value standard properly focuses on what the investor has
relinquished.118 As a consequence, it is a superior approach.
b. The Identity of the Purchaser. One of the more basic

objections to the fair market value approach and the related issue of
discounts is that the rationale for discounts is inapplicable when the
identity of the purchaser is considered. Put differently, because the
purchaser in an oppression buyout is almost always the majority (or
116. See supra note 109 (observing that a shareholder has relinquished his proportionate
interest in a going concern); cf Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989)
("Where there is no objective market data available, the appraisal process is not intended to
reconstruct a pro forma sale but to assume that the shareholder was willing to maintain his
investment position, however slight, had the merger not occurred.").
117. Even if a minority shareholder bought into a company at a discount, it is still fair to
provide an undiscounted buyout award to that shareholder when oppressive conduct occurs.
The minority shareholder's entrance into the company is often part of a voluntary transaction in
which the absence of control and the lack of liquidity are relevant factors. The minority
shareholder's exit from the company, however, is not part of a voluntary transaction, as the
majority's oppressive conduct has forced a redemption of the minority's shares. Providing an
undiscounted buyout award simply allows the minority to retain the benefit of his original
bargain - i.e., the minority bought in at a discount from pro rata value and, absent oppression,
he could have received pro rata value by remaining as a shareholder in the company. Moreover,
any perceived "windfall" to a minority who bought in at a discount but received an
undiscounted buyout award is tolerable given that a discounted buyout award would encourage
a majority shareholder to engage in oppression. See infra notes 127-28 and accompanying text
(discussing the incentives created by discounts); cf Wertheimer, supra note 115, at 645 n.146
("[I]f minority shareholders receive less than their pro rata share of the value of the
corporation, those engaging in the cash-out merger would necessarily receive more than their
pro rata share. This would violate tenets of fundamental fairness, and encourage wrongful
conduct."). See generally Wertheimer, supra note 115, at 645 n.146 (arguing that discounts
should be rejected in the appraisal context even if a shareholder acquired his stock at a
discount).
118. See supra Part II. A (describing the fair market value and enterprise value approaches
to the meaning of fair value).

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controlling) shareholder or the corpora

applying a minority or marketability discoun
As mentioned, the premise of the minor
control of a company has value.120 Cons
control shares are worth more to a purch
minority shares. Rather than pay a price
rata value of the company as a going conce
stake in a close corporation will pay less t
the purchased shares will lack control.121
Implicit in the justification for the minori
the critical assumption that the buyer, pos
over the company's affairs.122 This assump
ever) true in shareholder oppression dispu
court typically orders the majority shareh
purchase the aggrieved minority's share
majority shareholder or the corporation m
minority's shares.123 By definition, a maj
possesses control.124 Thus, when a m
shareholder) is the buyer, "it can hardly b
worth less to the purchaser because they ar
all, a purchase of the minority's holdings s
shareholder to further consolidate his control. Under these
119. See, e.g., Hollis v. Hill, 232 F.3d 460, 462, 464 (5th Cir. 2000) (purchase by a c
shareholder); Pooley v. Mankato Iron & Metal, Inc., 513 N.W.2d 834, 836 (Minn. Ct. A
(purchase by controlling shareholders); In re Fleischer, 486 N.Y.S.2d 272, 273 (App.
(purchase by a corporation); Davis v. Sheerin, 754 S.W.2d 375, 377-78 (Tex. A
(purchase by a majority shareholder); see also MODEL STAT. CLOSE CORP. SUPP. §
(providing a court with the authority to order "the corporation or one or mo
shareholders" to purchase the oppressed investor's holdings); infra note 132 (notin
purchaser in an oppression buyout is typically the corporation or the shareholder(s) in
120. See supra notes 87-89 and accompanying text (describing the minority discou
121. See, e.g., PRATT ET AL., supra note 79, at 45 ("In most cases, a minority interest
less than a pro rata proportion of the value of the enterprise as a whole."); id. at 300 (n
the minority discount rebuts the assumption that "a partial interest is worth a pro rata
the value of the total enterprise"); supra notes 87-89 and accompanying text (desc
minority discount).
122. See supra notes 87-89 and accompanying text (describing the minority discou
123. See supra note 119 and accompanying text (noting that the purchaser in an o
buyout is almost always the majority/controlling shareholder or the corporation); supr
and accompanying text (discussing election statutes).
124. See, e.g., Hetherington & Dooley, supra note 2, at 5 n.7 (defining a "m
shareholder as a shareholder "who possess [es] the actual power to control the operation
firm").
125. Brown v. Allied Corrugated Box Co., 154 Cal. Rptr. 170, 176 (Ct. App. 1979).

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circumstances, the premise of the minority discount is absent.

buyer, postpurchase, will not own a minority stake in the venture, n
will he lack control over the company's decisions.126 In fact, applying
minority discount when the majority is the purchaser might act
encourage the majority to engage in oppression, as it presen
unique arbitrage opportunity. For every 1 percent of the compa
that the majority acquires from the minority in a buyout proceed
the majority will pay something less than 1 percent of the value of t
company, even though the majority has control over the busines
126. As Professor Bahls observes:
Sale of the minority shareholders' stock to the corporation or majority shareholders is

unlike a sale to third parties. When a shareholder sells his or her shares to third
parties, the value of the shares sold by shareholders to third parties is indeed
diminished because the third party has no right to control management. A sale to
majority shareholders of a corporation, however, simply serves to consolidate the
interests of those already in control. To require application of a minority discount in
this case would result in a windfall for majority shareholders ....
Bahls, supra note 89, at 302; see, e.g., Brown, 154 Cal. Rptr. at 176 ("[T]he rule justifying t
devaluation of minority shares in closely-held corporations for their lack of control has lit
validity when the shares are to be purchased by someone who is already in control of
corporation."); Royals v. Piedmont Elec. Repair Co., No. 97 CVS 720, 1999 WL 33545516,
*13 (N.C. Super. Ct. Mar. 3, 1999), affd, 529 S.E.2d 515 (N.C. Ct. App. 2000) (observing t
"[t]he majority shareholders are thus in a position to have the company buy the shares wh
could then be resold with the majority shares at a value based upon 100% control value,"
concluding that "[t]hey should not be allowed to buy at a discounted price that which they cou
immediately turn around and resell at full value"); Robblee v. Robblee, 841 P.2d 1289, 1
(Wash. Ct. App. 1992) ("[Recognition of a minority discount has little validity when t
corporation or someone already in control of the corporation is the purchaser."); id. at 12
(noting that after a buyout, the majority shareholder's ownership "will go to almost 80% and
will be ridding himself of a minority shareholder who had become, and would continue to
extremely difficult," and stating that "[t]his is one of the very reasons a minority shareholde
stock should not be discounted to fair market value, because the value to the [majori
shareholder] is different from what it would be in the market"); Murdock, supra note 29, at 4
("In both dissenters' rights proceedings and those involving a judicial buy-out, the purchaser o
the minority shares is either the corporation or those in control. Accordingly, the purchaser
the minority shareholders' interest does not thereafter hold a minority interest."); id. ("One o
the rationales for [the minority] discount[] is that the purchaser would pay less because he
she would not be able to exercise any control over the investment after the purchase. Th
obviously is not true if the purchaser is the majority shareholder.").
127. See, e.g., McKesson Corp. v. Islamic Republic of Iran, 116 F. Supp. 2d 13, 36 (D.D
2000) ("Courts rejecting the minority discount have reasoned that the application of t
discount would provide the majority with a windfall because they would receive a controll
level of value from the newly obtained shares but only have to pay a non-controlling price fo
them."), affd sub nom. McKesson HBOC, Inc. v. Islamic Republic of Iran, 271 F.3d 1101 (D.
Cir. 2001); id. ("Because allowing discounts creates incentives for oppressive behavior, b
[minority and marketability] discounts are particularly] disfavored where the stock trade i
result of such behavior."); Balsamides v. Protameen Chems., Inc., 734 A.2d 721, 738 (N.J. 19
("The [oppression] statute does not allow the oppressor to harm his partner and the compa
and be rewarded with the right to buy out that partner at a discount. We do not want to affor

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Giving the majority an incentive to oppress is, o

When the corporation is the buyer of the
minority discount remains inapposite. Sto
corporation is often characterized as "trea
longer outstanding.129 The corporation, as an
a shareholder that now owns a minority sta
effect of the corporation's purchase of its ow
percentage ownership of the remaining share
shareholder any incentive to oppress other shareholders."); F

661 N.E.2d 972, 977 (N.Y. 1995) ("[A] mandatory reduction in
to reflect their owners' lack of power in the administration
encourage oppressive majority conduct, thereby further
necessary to pay for the value of minority shares."); Royals, 19
minority and marketability discounts on the ground that the b
"be interpreted in such a way as to provide an incentive for
minority shareholders and force them to sell"); Murdock, supra
argues against a discounting process in order that there b
oppressive fashion."); see also Blake v. Blake Agency, Inc.,
1985) ("[The dissolution for oppression statute] was enacted
shareholders, and the corporation should therefore not rece
discount . . . ."); Murdock, supra note 29, at 489 ("[I]t is incomp
that drives the minority out of the corporation can doubly adva
down the value of minority shares."); cf. Brown, 154 Cal. Rptr.
shareholder has been using his position to insure that no benef
of the minority shares, then an argument could be made that t
should be reduced even further, perhaps to zero."); Wertheim
minority shareholder did not receive a full pro rata share of th
engaging in the cash-out merger would, by definition, receive
the value of the corporation."); id. ("This would permit them to
out merger, and would encourage controlling shareholders t
minority shareholders.").
128. See supra note 127 and accompanying text (noting th
actually encourage oppressive conduct).
129. See, e.g., James D. Cox & Thomas Lee Hazen, Cox & Hazen on Corporations
§21.11, at 1287 (2ded. 2003):
[A] corporation usually has the option on reacquisition of shares to treat them as
treasury shares or to retire or cancel them. Treasury shares are carried on the books
as authorized and still issued but not outstanding. When retired or cancelled, the
shares usually retain the status of authorized but unissued shares.
(footnotes omitted).
130. The remaining investors, in other words, own the same number of shares that they
owned before the corporation's purchase, but the number of outstanding company shares has
decreased. See supra note 129 and accompanying text (discussing treasury stock). For example,
a shareholder formerly owning one share out of a total of ten company shares may now own one
share out of a total of five company shares. Because of the corporation's purchase, the
shareholder's percentage ownership increased from 10 percent (1/10) to 20 percent (1/5). See

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already possessed by a majority shareholder, in other words, sim

increases as a result of the corporation's purchase.131 Thus,
where the corporation is the purchaser, the rationale for the min
discount is absent. The corporation's buyout of the minority doe
result in a purchaser that owns a noncontrolling stake in t
company.132
With respect to the marketability discount, the discoun
presumes that purchasers will pay less for close corporation sto
because the lack of an established market makes such shares difficult
to sell.133 Where the purchaser is a majority shareholder, however, this
rationale is weak, as a controlling position in a company is far easier
to sell than a minority position. As one commentator observes:
It seems particularly inappropriate to apply such a [marketability]
discount when a shareholder is selling to a person or family that
owns all or most of the other shares of the corporation. While the
lack of a market affects the ability to sell minority shares in a
company, the market for all of a company's assets or shares or for a
controlling interest operates differently and may not be adversely
also infra note 131 (providing another example of the effect of a corporation's purchase of its
own stock).
131. See, e.g., Murdock, supra note 29, at 486 ("[I]f the purchaser [of the minority's shares] is
the corporation, the effect of the purchase is to increase the control which a majority
shareholder already has."); id. ("For example, if shareholdings were split on a 60:20:20 ratio and
the corporation purchased one 20% holding, the 60% shareholder would then hold 75% and he
alone could provide the two-thirds approval necessary for some corporate action in some
states."); see also supra note 130 (providing another example of the effect of a corporation's
purchase of its own stock).
132. See, e.g., Charland v. Country View Golf Club, Inc., 588 A.2d 609, 612 (R.I. 1991)
("When a corporation elects to buy out the shares of a dissenting shareholder, the fact that the
shares are noncontrolling is irrelevant."); Murdock, supra note 29, at 486 ("In both dissenters'
rights proceedings and those involving a judicial buy-out, the purchaser of the minority shares is
either the corporation or those in control. Accordingly, the purchaser of the minority
shareholders' interest does not thereafter hold a minority interest."); Thompson, supra note 19,
at 234 ("[S]uch a [minority] discount would be inappropriate since the [buyout] purchase is by
controlling shareholders or the corporation; to apply such a discount would be to further
oppress minority shareholders aggrieved by the controlling shareholders' misconduct."); see also
Hansen v. 75 Ranch Co., 957 P.2d 32, 41 (Mont. 1998) ("[T]he majority of courts addressing the
issue of minority discounts has held that discounts should not be taken when determining fair
value of minority shares sold to another shareholder or to the corporation.").
133. See, e.g., PRATT ET AL., supra note 79, at 332 ("All other things being equal, an interest
in a business is worth more if it is readily marketable or, conversely, worth less if it is not.
Investors prefer liquidity to lack of liquidity. Interests in closely held businesses are illiquid
relative to most other investments."); id. at 46 (noting that a "discount for lack of marketability
reflects a value decrement due to lack of liquidity"); supra Part II. C (discussing the
marketability discount).

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influenced by the fact that the company's share

securities market.134
Given the lesser difficulty of disposing of

shares, a marketability discount should be su
not rejected outright, when a majority sharehol
134. Thompson, supra note 19, at 235. Similarly, as Professo

If, however, a minority block of shares is sold to a sh
controlling shareholder after the sale, the full discount for
be inappropriate. To the extent that the purchase allow
consolidate control, there may be a ready market for the
majority shareholder's stock. While a minority interest
difficult to sell, a majority interest might be sold much eas
control may enable the majority shareholder to realize a con
Bahls, supra note 89, at 303; see PRATT ET AL., supra not
liquidating a minority interest in a closely held company gen
difficulty in liquidating a controlling interest."); id. at 301 ("
company may also be subject to some discount for lack of mark
as much as minority shares."); Pratt ET AL., supra note 90,
harder to sell a minority ownership interest than to sell a cont
same closely held business."); Hood et al., supra note 79, at 4
illiquidity of a controlling block of stock is somewhat qu
Martin J. Whitman, Valuing Closely Held Corporations and
Limited Marketability: Approaches to Allowable Discounts fr
2213, 2226-27 (1978) ("[W]e believe that as long as businesses
always markets for control blocks of stock
shares exist, no discounts from gross value should logically

marketability
(NJ. 1999) (involving a valuation expert who testified, in

shareholder bought out the other 50 percent shareholder,
discount was warranted, perhaps seven percent to reflect a b
When a majority shareholder's purchase results in
corporation's stock, a marketability discount makes even less
is no minority shareholder to account for and, correspondin
oppressively failing to consider the minority's interests. T
ownership of a company is more attractive than ownershi
percent) interest. Cf. Laserage Tech. Corp. v. Laserage Lab
1992) (noting that the district court rejected a minority disc
the buy-out would mean that [the close corporation] would n
substantial minority interest which has been the adversa
undoubtedly very expensive complex of legal proceedings'"
135. See supra note 134 and accompanying text (observin
close corporation is considerably easier to liquidate than
company). But see infra note 198 and accompanying text (no
may suffer from a lack of marketability).
In a family business, which close corporations often
marketability discount is even more apparent. Family memb
to own a stake in the company. Illiquid stock is, therefor
company's stock less attractive to outsiders. See, e.g., Hayn
(noting that marketability discounts may be inappropriate f

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2004] SHAREHOLDER OPPRESSION AND "FAIR VALUE" 33 1
Even when the purchaser of the minority's shares is a

corporation, the justification for the marketability discount is missing.
Once again, a corporation's purchase of its shares does not leave the
corporation as an investor owning shares in itself.136 Thus, it makes no
sense to view the corporation as a purchaser that will discount the
price of the minority's shares to reflect its concern about reselling the
shares in the future.
When the purchaser in a buyout proceeding is a majority
shareholder or a corporation, therefore, the rationale for applying
minority and marketability discounts is weak, if not absent. In the
New York decision of In re Gift Pax, Inc. {Gift Pax),137 however, the
court concluded that New York's statutory election scheme
prohibited it from considering the purchaser's identity. In Gift Pax, a
referee appointed by the court to determine the fair value of the
petitioner's shares for buyout purposes refused to apply a
marketability discount on the ground that "[the respondent
corporations], by electing to purchase the petitioner's shares . . . ,
became the willing and available buyers."138 The referee, in other
words, considered that the corporations were purchasing the
petitioner's shares, and he presumably rejected a marketability
discount on that basis - i.e., a marketability discount is inapposite
when the corporation is the purchaser.139 The buyout election statute
in New York, however, stated that the court should determine the
"fair value of the petitioner's shares as of the day prior to the date on
which such petition [for dissolution] was filed, exclusive of any
element of value arising from such filing."140 Because of this language,
the court determined that it could not consider any event occurring
after March 27, 1980- the day prior to the March 28, 1980 filing of the
dissolution petition. As a result, the court concluded that it had to
value the petitioner's shares assuming that the respondent
businesses, the members do not want outsiders to have ownership interests. Thus, the lack of
marketability can actually enhance the value of the stock . . . ."); see also Morrow v. Martschink,
922 F. Supp. 1093, 1105 (D.S.C. 1995) (quoting the same language from Haynsworth, supra note
89, at 489 n.92).
136. See supra note 129 and accompanying text (discussing treasury stock).
137. 475 N.Y.S.2d 324 (Sup. Ct. 1984).
138. Mat 328.
139. See supra note 134 and accompanying text (discussing the inapplicability
marketability discount when a corporation is the purchaser); see also infra note 143 (q
the rationale of the referee in Gift Pax).
140. N.Y. BUS. CORP. Law §§ 1104-a, 1118 (McKinney Supp. 2003).

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corporations had not elected to buy out the p

occurred after the March 27, 1980 valuation d
In this proceeding, the petition [for dissolu
grounds] was filed on March 28, 1980; therefor
is March 27, 1980. The Referee's expert and the
to apply an illiquidity discount by reason o
[respondent corporations] were the purchasers
shares, improperly made April 3, 1980[ - ]the date of the
respondents' election to purchase the sharesf - ]as the date of
valuation. Furthermore, the explicit language contained in the
statute requiring that there be no consideration given to either an
increase or diminution in value arising from the filing of the petition,
was also violated when an illiquidity discount was not applied.
Indeed, on this issue, the independent expert testified that the sole
reason he did not impose an illiquidity discount was that [the
respondent corporations] elected to purchase under [New York's
election statute]. Clearly, he was increasing fair value based upon
[the] election, and this he could not do.141
The court concluded that the referee should have applied a 25

percent marketability discount in calculating the fair value of the
petitioner's shares.142
The Gift Pax decision is puzzling. Perhaps the most puzzling
aspect of the decision is the court's use of the valuation date to reject
the referee's consideration of the purchasers' identity (and the
referee's refusal to apply a marketability discount on that basis).143
The designation of the valuation date is typically an independent
issue - an issue that is wholly separate from the debate over
discounts - that significantly affects the determination of a company's
fair value. For this reason, the choice of the valuation date is
141. In re Gift Pax, 475 N.Y.S.2d at 328.

142. See id. ("[T]here was sufficient evidence presented which required the Referee to apply
a 25% lack of marketability discount
143. Even the referee's rationale for rejecting the market

referee rejected the discount on the ground that the respon
and available buyers" by electing to purchase the petitioner'
that the referee was emphasizing that the corporations
marketability discount was inapposite in that context, the r
supra note 134 and accompanying text (discussing the ina
discount when a corporation is the purchaser). If the refere
"willing and available" buyers, however, his rationale was s
"willing and available" purchaser in a buyout proceeding
marketability discount. See infra Part III.B.3 (criticizing the liq

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discussed in a subsequent Part.144 The Gift Pax decision is unique

however, in that it blends (albeit erroneously) the valuation date and
discount issues. Indeed, the court determined that the valuation date
prohibited the referee from denying a discount on the basis of the
purchasers' identity. In this respect, it is appropriate to discuss the
Gift Pax decision here.
The Gift Pax court apparently believed that the above-quoted
language from the buyout election statute ("fair value of the
petitioner's shares as of the day prior to the date on which such
petition [for dissolution] was filed, exclusive of any element of value
arising from such filing") prevented it from considering that the
respondent corporations had elected to purchase the petitioner's
shares.145 It is worth repeating, however, that the statutory language
relied on by the court was found in the buyout election statute.146 The
purpose of such a statute is to provide a majority counterbalance to
the minority's right to seek dissolution. By purchasing the minority's
shares, the majority circumvents any liability inquiry and eliminates
the potential risk of dissolution of the company.147 Given this purpose
of the election statute (and as this Article further discusses in Part
IV.B.l), the likely intent of the command to determine fair value "as
of the day prior to the date on which [the dissolution] petition was
filed"148 was to provide a fixed date for the prospective purchaser to
assess whether it would be prudent, as well as financially feasible, to
144. See infra Part IV (discussing the valuation date).

145. See supra note 140 and accompanying text (quoting the New York election statute);
supra note 141 and accompanying text (providing the court's reasoning). Even if thi
interpretation of the statutory language is correct, one wonders why the court believed that it
inexorably led to a conclusion that a marketability discount was required. On any given day, a
minority ownership position can be valued assuming that the minority sells his position, or
assuming that the minority retains his position. If a sale is assumed, discounts may be
appropriate, as certain third-party purchasers will care about the features (or lack thereof)
associated with the shares. See supra Parts II.B-C (discussing minority and marketability
discounts). If retention is assumed, however, discounts are inappropriate, as a shareholder can
expect to receive, over time, his proportionate share of the corporation's going-concern value
See supra notes 110-14 and accompanying text (discussing the retention of an ownership
position). Even if the court was correct in believing that it could not consider the buyout context
at issue, therefore, it nevertheless should have confronted the issue of what "fair value" on any
particular date means - an assumed sale on that date, or an assumed retention from that date
forward.
146. See In re Gift Pax, 475 N.Y.S.2d at 328 (quoting N.Y. BUS. CORP. LAW § 1118
(McKinney Supp. 1992)). The Gift Pax holding, therefore, is only applicable to election cases.
147. See infra notes 283-85 and accompanying text (discussing the purpose of election
statutes).
148. N.Y. BUS. CORP. Law § 1118 (McKinney Supp. 2003).

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purchase the holdings of the petitioning inve

the purpose of the election statute, a majori
able to assess whether his interests are bette
liability or by making an election to purchase
statutory language is to designate a speci
purposes so that a majority shareholder has
making this assessment, not to prohibit courts
known purchaser has elected to buy out
context is so important to valuation,150 this int
sensible than the Gift Pax court's belief that
to preclude courts from considering both the id
and the more general fact that an electio
differently, it is hard to believe that a statut
election by certain parties was also meant to
considering that one of those parties has actuall
Similarly, the language "exclusive of any el
from such filing"152 is likely meant to elimi
filing of a dissolution petition might hav
company. A dissolution-for-oppression petit
that usually reveals serious discord among th
corporation. If employees, creditors, supplier
to the health of a business become aware of s
a very serious impact on the company's f
minority shareholder wishing to exercise his rig
149. See infra notes 283-89 and accompanying text (disc

statutes and the reasoning underlying election decisions).
150. See supra notes 98-99 and accompanying text (not
valuation).
151. The appellate court arguably shared this sentiment. Although it affirmed the
marketability discount of the superior court, it did so by simply citing precedent. The appellate
court made no mention of the superior court's interpretation of the election statute language.
See In re Fleischer, 486 N.Y.S.2d 272, 275 (App. Div. 1985) (affirming the 25 percent
marketability discount, but noting only that "[i]n determining the 'fair value' of [close
corporation] shares . . ., discounts for ... lack of marketability ... are appropriate and do not
provide a windfall to the majority shareholders merely because the shares to be purchased by
the majority . . . constitute a minority interest in the corporation" (citing Blake v. Blake Agency,
Inc., 486 N.Y.S.2d 341, 347 (App. Div. 1985)).
152. N.Y. Bus. Corp. Law §1118(b).
153. When a company is threatened with dissolution, for example, it is not hard to imagine
that key employees may decide to depart for more stable businesses. Similarly, banks and other
lending institutions may decide that additional credit should not be extended to the corporation
until its viability as a continuing entity is resolved. On the same basis, suppliers may decide to
cease providing new goods.

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2004] SHAREHOLDER OPPRESSION AND "FA/7? VALUE" 335
oppression should not be deterred from doing so because of the fe

that requesting such relief will diminish any recovery. The statuto
language seems designed to eliminate this deterrent by clarifying t
a company will be valued without considering the effect of the fil
of the dissolution petition itself.154 To say that the language is me
to prohibit a court from considering that a responsive election h
been made, and that a majority shareholder or a corporation
behind the election, goes too far. Once again, an interpretation th
forces a court to ignore the buyout context of the valuation should
rejected on the grounds that it is entirely antithetical to the concept o
valuation itself.155
In short, given that a majority (or controlling) shareholder or
corporation is frequently the purchaser in an oppression buy
setting,156 the context of the buyout is ill-suited to minority an
marketability discounts. Courts should logically reject discounts wh
the premises underlying their application are absent in the
circumstances at issue. Because the enterprise value approach avoids
154. One wonders, however, why the "exclusive of any element of value arising from such
filing" language is needed at all given that the language immediately preceding it in the election
statute clearly states that the valuation should be performed as of the date before a petition is
filed. See N.Y. Bus. CORP. LAW § 1118 (stating that the court shall "determine the fair value of
the petitioner's shares as of the day prior to the date on which such petition [for dissolution] was
filed, exclusive of any element of value arising from such filing"). After all, if a company is
valued as of the day before a dissolution petition is filed, the effect of the next-day filing
presumably has not yet occurred. Perhaps the "exclusive ... of value arising from such filing"
language is meant to cover the situation in which the company's value has been impacted by
some outside knowledge that a dissolution proceeding will be filed, even though the actual filing
has not yet taken place. For example, key employees in day-to-day contact with an aggrieved
shareholder may be told that dissolution litigation will soon commence. One can imagine that
employees might decide to exit the corporation at that point rather than to wait around for the
result of litigation. Such an exodus could affect a company's valuation even before the actual
filing of a dissolution petition. Alternatively, perhaps the language was simply borrowed from
the analogous statute in the appraisal context, with little thought given to its purpose in the
dissolution context. See N.Y. BUS. CORP. Law § 623(h) (McKinney Supp. 1981) (stating that
"fair value" in an appraisal should be determined "as of the close of business on the day prior to
the shareholders' authorization date, excluding any appreciation or depreciation directly or
indirectly induced by such corporate action or its proposal"). It should be noted that New
York's appraisal statute no longer contains this "excluding" language. See N.Y. BUS. CORP.
Law § 623(h) (McKinney Supp. 2003) (omitting the "excluding" clause and stating that a court's
fair value assessment may account for "all other relevant factors").
155. See supra notes 98-99 and accompanying text (noting that context is critical to
valuation).
156. See supra note 119 and accompanying text (noting that the purchaser in an oppression
buyout is frequently the majority/controlling shareholder or the corporation).

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incorporating discounts, it is superior to a fa

in the shareholder oppression context.
2. Statutory Language. The buyout statu

large commercial states, as well as the buy
Revised Model Business Corporation Act, a
fair value.157 In these jurisdictions, one of
powerful arguments for rejecting discounts is t
state legislature consciously chose the term
market value," presumably to signify disapp
value approach and the discounting that woul
argument is strengthened when other statute
use the term "fair market value," as it indic
knew how to provide for a fair market value
one.159
Proponents of discounts argue that the "fair value" statutory

language supports a contrary inference. Many of the buyout statutes
157. See supra notes 60-63 and accompanying text (discussing fair value buyouts).
158. See, e.g., Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 361 (Colo. 2003) (noting
that the legislature used the term "fair value" and not "fair market value"); Devivo v. Devivo,
No. CV980581020, 2001 WL 577072, at *4 (Conn. Super. Ct. May 8, 2001) ("[T]he legislature, or
the drafters of the model business corporation act, could have employed 'fair market value' as
the standard if they meant that meaning. The fact [that] they did not is highly significant. . . .
[F]air value ... is not synonymous with fair market value."); Royals v. Piedmont Elec. Repair
Co., No. 97 CVS 720, 1999 WL 33545516, at *12 (N.C. Super. Ct. Mar. 3, 1999):
If the Legislature had intended for the valuation to be set at "fair market value," it could
have and would have used that term. Instead, it chose to use a broader definition ["fair
value"] which gave the trial court more leeway in determining value for purposes of the
alternative relief provided by the statute.
Matthew G. Norton Co. v. Smyth, 51 P.3d 159, 163 (Wash. Ct. App. 2002) ("It is clear, however,
that our Legislature's use of the term 'fair value' was not a slip of the pen - the Legislature did
not intend to say 'fair market value,' instead."); see also Joseph W. Anthony & Karlyn Vegoe
Boraas, Betrayed, Belittled . . . But Triumphant: Claims of Shareholders in Closely Held
Corporations, 22 WM. MITCHELL L. REV. 1173, 1186 (1996) ('"Fair value' is not the same as, or
short-hand for, 'fair market value.' 'Fair value' carries with it the statutory purpose that
shareholders be fairly compensated, which may or may not equate with the market's judgment
about the stock's value." (footnote omitted)); Bobbie J. Hollis II, The Unfairness of Applying
Lack of Marketability Discounts to Determine Fair Value in Dissenters' Rights Cases, 25 J. CORP.
L. 137, 142 (1999) ("The decision by the state to use one term ['fair value'] over the other ['fair
market value'] cannot be viewed as arbitrary."). The argument is usually strengthened by
references to other statutes in which the legislature did use the "fair market value" term. See
infra note 159 and accompanying text (referencing other statutes).
159. See, e.g., Pueblo Bancorporation, 63 P.3d at 362 ("If the General Assembly intended to
create a fair market value measure for the price of a dissenter's shares, it knew how to provide
it; the phrase has been used many times in a wide variety of other statutes."); id. (citing
statutes).

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explicitly state that "the fair value of the petitioner's shares" is t

determined.160 By focusing the analysis on the value of the aggri
investor's shares, discount proponents contend that the statu
language suggests a fair market value standard in substance, eve
not in form. Such language conveys, in other words, that it is t
particular shares themselves, along with the shares' favorabl
unfavorable attributes (e.g., lack of control or lack of liquidity),
courts are to value.161
Although it is true that buyout statutes are phrased in terms
determining the fair value "of the petitioner's shares," such lang
does not imply that a fair market value analysis was intended. T
phrase "petitioner's shares" is neutral language that simply refer
an aggrieved investor's ownership stake in a company. A buy
always values a "petitioner's shares" in the sense that a buyout w
only cover the number of shares owned by a petitioner. Whe
those shares are valued by their worth in a market sale, or by t
worth as a proportionate fraction of a company's overall value, is
the question.162 That question turns only on what "fair value" me
not on the neutral "petitioner's shares" language. Thus, the inclus
of the "petitioner's shares" language does not dilute the signific
of the legislature's decision to use "fair value" rather than "
market value."163 If the legislature had intended for the well-kn
160. N.Y. BUS. CORP. LAW § 1118(b) (McKinney Supp. 2003) (emphasis added); s
§ 1118(a) (stating that the corporation or its shareholders may "elect to purchase the s
owned by the petitioners at their fair value" (emphasis added)); MODEL BUS. CORP
§ 14.34(d) (2002) ("If the parties are unable to reach an agreement ... the court . . . shal
determine the fair value of the petitioner's shares
Close Corp. Supp. § 42(b)(l) (1997) (stating that a court shall "d
shares").
161. See, e.g., Emory, supra note 67, at 1169 ("By defining the entity to be valued as the
[aggrieved minority's] own shares, rather than as the entire corporation, the statute appears to
contemplate valuing the [aggrieved minority's] shares on the basis of what they are - a minority
interest [in an illiquid close corporation]."); see also Atl. States Constr. Inc. v. Beavers, 314
S.E.2d 245, 251 (Ga. Ct. App. 1984) (noting, in an appraisal case, that the "focus of the
valuation process is on the value of the stock held by the dissenting shareholders, not on the
value of some specified percentage of the corporate worth").
162. See supra Part II.A (describing the fair market value and enterprise value approaches
to the meaning of fair value).
163. See supra notes 157-59 and accompanying text (distinguishing fair value and fair
market value). One wonders, however, why state legislatures were not clearer about their
intentions. After all, if a legislature had truly intended for the statutory "fair value" term to
mean a pro rata share of enterprise value, rather than fair market value, it easily could have said
so. A statute could state, for example, that a court should determine the buyout price by
calculating the "fair value of the enterprise and by awarding the petitioner its proportional share

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fair market value standard to govern buyou

would have used that term.164
3. The Undercompensation Argument, The goal of the

shareholder oppression doctrine is to "protect the fair value of the
close corporation shareholder's investment."165 The components of a
close corporation shareholder's investment, however, differ
significantly from the components of a public corporation
shareholder's investment. In a public corporation, a shareholder
commits his capital with the expectation that the investment entitles
him to a proportionate share of the company's value.166 Accordingly, a
public corporation shareholder understands that his investment
return will be comprised solely of financial sums reflecting this
proportionate share (e.g., dividend payments).167 Stated differently,
of that enterprise value." Alternatively, the legislature could have directed that a petitioning
shareholder be awarded his "proportional share of the fair value of the enterprise."
164. Some have argued that a legislature's choice of "fair value" over "fair market value" is
not particularly significant. Fair market value suggests a market benchmark. Yet close
corporations, by definition, lack a market for their shares. See supra notes 31-32 and
accompanying text (discussing the absence of a market for close corporation stock). The term
"fair market value," therefore, suggests a standard that is not descriptively accurate, and a
different term may be more appropriate. The choice of "fair value" over "fair market value," in
other words, may reflect considerations of style rather than substance. Emory, supra note 67, at
1170. As one commentator observes:
The terms fair value and fair market value have been used in case law to describe one
general principle: the inherent value of an asset. In cases where a ready market for
shares exists, courts have used the term fair market value. Where no market exists,
another valuation method is employed to determine the fair value of shares.
Essentially, these values are the same, only determining fair value without the aid of a
market place causes the court to adopt and recognize other methods of evaluation
which are most equitable under the facts.
Id. at 1171 (citing Pohl v. Milsco Mfg. Co., No. 89-CV-02091, slip op. at 6 (Wis. Cir. Ct. July 12,
1991)); see also Devivo v. Devivo, No. CV980581020, 2001 WL 577072, at *3 (Conn. Super. Ct.
May 8, 2001) ("The terms actual valuation, actual value, market value, fair market value,
market price and fair value are synonymous in the determination of the valuation of property
for assessment purposes, but the term 'fair value' is the preferable one." (quoting Bridgeport v.
Stratford, 216 A.2d. 439, 440 (Conn. 1966))).
165. Moll, supra note 52, at 731.
166. A 12 percent shareholder, for example, expects that his investment entitles him to 12
percent of the corporation's profits, generally received through capital appreciation or
dividends. See infra notes 167-68 and accompanying text (discussing the investment return of
the public corporation shareholder).
167. See, e.g., Exadaktilos v. Cinnaminson Realty Co., 400 A.2d 554, 560 (N.J. Super. Ct.
Law Div. 1979) ("Large corporations are usually formed as a means of attracting capital
through the sale of stock to investors, with no expectation of participation in corporate
management or employment. Profit is expected through the payment of dividends or sale of
stock at an appreciated value."); Terry A. O'Neill, Self-interest and Concern for Others in the

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a[t]he shareholder of a publicly traded corporation invests money

with a view to receiving money, as opposed to steady employmen
associational benefits, in return."168
In a close corporation, a shareholder typically commits his cap
with the expectation that the investment entitles him to employm
and to a management role, as well as to a proportionate share of
company's value.169 A close corporation shareholder, therefo
usually understands that his investment return will be comprised
employment benefits, management participation, and financial su
reflecting a share of the company's gains.170 The components o
Owner-Managed Firm: A Suggested Approach to Dissolution and Fiduciary Obligation in

Corporations, 22 SETON Hall L. Rev. 646, 663 (1992) ("The shareholder of a publicly
corporation may realize a return on her investment in either of two ways: directly
distribution of dividends, or indirectly, by an increase in the market value of her shares.").
168. O'Neill, supra note 167, at 663; see also Schlafge, supra note 57, at 1073 n.14 (n
that the interests of public corporation shareholders are "limited to the amount of their d
investment in their shares, which can be sold at any time on the public market, and [are] no
to their salary and other employment benefits").
169. See, e.g., Exadaktilos, 400 A.2d at 561 ("Unlike their counterparts in large corpora
[close corporation minority shareholders] may expect to participate in management
influence operations, directly or indirectly, formally or informally."); id. ("Furthermore, t
generally is an expectation on the part of some participants that their interest is to be reco
in the form of a salary derived from employment with the corporation."); Balvik v. Syl
411 N.W.2d 383, 386 (N.D. 1987) ("[I]t is generally understood that, in addition to suppl
capital and labor to a contemplated enterprise and expecting a fair return, parties comp
the ownership of a close corporation expect to be actively involved in its management
operation."); Schlafge, supra note 57, at 1077 n.29 ("[Public corporation and close corpora
investors expect appreciation in the value of their investment. Investors in [public] corpora
receive dividends as a form of return on this investment, while investors in [close] corpor
may expect to receive a salary and a management position as a condition of their investm
(emphasis added)); see also Michaud v. Morris, 603 So.2d 886, 888 (Ala. 1992) ("Certain
expectations of investors are enforceable in the courts, and among those is a right to
proportionally in corporate gains."); Bahls, supra note 89, at 330 ("Shareholders in
corporations expect proportional distribution of the earnings of the corporation while
operating."); infra note 170 and accompanying text (discussing the investment return
close corporation shareholder).
170. See, e.g., Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 662 (Mass.
("The minority stockholder typically depends on his salary as the principal return
investment
("[Ejmployment is, of course, a frequent and perfectly pr

corporation."); id. at 126 (noting that "the primary benefi
shareholder] receives from the corporation is contin
family"); Ingle v. Glamore Motor Sales, Inc., 535 N.E.2d
dissenting) ("A person who . . . buys a minority interest i
in the hope of enjoying an increase in value of his stake i
employment in the business in a managerial position.")
Inc., 507 P.2d 387, 397 (Or. 1973) ("It is also true tha
legitimate interest in the participation in profits ea

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close corporation investment, in other word

much broader than the components of a public corporation
investment. As a result, the shareholder oppression doctrine must
concern itself with protecting much more than an investor's
proportionate share in the success of a company.171
For many close corporation investors, the desire for employment
(and, to some extent, for management participation) is the principal
enticement motivating their decision to commit capital to a venture.172
Corporations, supra note 15, § 1.08, at 1-32 ("Even if [close corporation] shareholders . . .
anticipate an ultimate profit from the sale of shares, they usually expect (or perhaps should
expect) to receive an immediate return in the form of salaries as officers or employees of the
corporation rather than in the form of dividends
courts have recognized the reality that compensation paid to

function: to recompense services and to provide a return on in
57, at 1110 (noting that a close corporation shareholder "often i
a job, and the salary and other benefits he receives are conceive
investment"); id. at 1109 ("In a closely held corporation, a sha
in his job and stock that are often economically intertwined."
an employee in a closely held corporation usually involves ap
investment by the remaining shareholders."); Schlafge, su
302A.751 [the Minnesota statute protecting minority shareholde
in a closely held corporation legitimately expect a return of the
of a management position and a salary."); see also supra n
(discussing the expectations of close corporation shareholders)
171. Cf Meiselman v. Meiselman, 307 S.E.2d 551, 565 (N.C.
that a close corporation shareholder is entitled to relief only
rights" have been infringed: "While it may be true that a sh
corporation may have 'rights or interests' defined as defendants
a [close] corporation may not necessarily be so narrowly d
shareholder's] 'reasonable expectations' are not as limited as d
172. See, e.g., 1 CLOSE CORPORATIONS, supra note 15, § 1.08
employment may have been the principal reason why the share
the corporation."); see also Wilkes, 353 N.E.2d at 662 ("A guar
corporation may have been one of the 'basic reason(s) why
capital in the firm.'" (quoting Symposium, The Close Corporat
(1957))); In re Wiedy's Furniture Clearance Ctr. Co., 487 N.
("Although the exact amount of the capital contribution is dispu
funds in getting this new venture underway, not simply as
employment and a future for himself."); Alyse J. Ferraro, No
Inc.: The Battle Between Ownership and Employment in the
LAB. LJ. 193, 215 (1990) ("Ingle was compensated for the sale
the dollar amount received met his expectations would . . . d
those shares. Ingle had reasonably expected his employment to c
or to acquire his own Ford dealership ... ."); Murdock, supr
often invest in a closely-held corporation to provide a job is alm
deny a minority shareholder employment when a job was par
oppressive, as is the failure to pay dividends to nonemploy
shareholders are receiving de facto dividends through salar
omitted)); id. at 472 ("[W]hat is at stake in the 'oppression

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Compared to similar employment in other contexts, a close

corporation job is frequently associated with a higher salary,173 a
prestigious management position,174 and intangible benefits stemming
from self-employment.175 Thus, the loss of a close corporation job may
attractive job."); Ragazzo, supra note 57, at 1110 (noting that a close corporation shareholder
"often invests for the purpose of having a job").
173. See, e.g., 1 OPPRESSION, supra note 20, § 3:07, at 3-70 n.5 (noting that "the special
prerogatives enjoyed by a majority in a close corporation not infrequently block the sale of a
close corporation because the majority has difficulty obtaining such lucrative employment
elsewhere" (citing J.C. Hetherington, Special Characteristics, Problems, and Needs of the Close
Corporation, 1969 U. ILL. L.F. 1, 20 n.72)); PRATT ET AL., supra note 79, at 121 ("It is not
uncommon to find an owner/manager of a successful closely held company earning a greater
amount in annual compensation than the amount an equivalent nonowner employee would earn
as compensation."); Ragazzo, supra note 57, at 1109 ("The shareholder may invest for the
purpose of having a job that produces higher compensation than could be garnered through
employment by third parties."); see also Bonavita, 692 A.2d at 124 ("[W]hile there is no claim
that the [close corporation] salaries are excessive, neither was there a showing that if the 'inside'
employment were terminated those family members could earn as much elsewhere."); Nelson v.
Martin, 958 S.W.2d 643, 644 (Tenn. 1997) (noting that the annual compensation of a
shareholder-employee of a commercial printing business "was in excess of $250,000"). This
assertion, of course, assumes a comparison between similar jobs in businesses at similar stages of
development.
174. See, e.g., Wilkes, 353 N.E.2d at 659-60 & n.9 (observing that all of the close corporation
participants were directors of the company and that the offices of president, treasurer, and clerk
were held by each of the participants over the years); Balvik v. Sylvester, 411 N.W.2d 383, 384
(N.D. 1987) (noting that both participants in a close corporation were directors of the company
and observing that one shareholder-employee served as the president and the other served as
the vice-president); see also 1 OPPRESSION, supra note 20, § 3:07, at 3-67 (referring to the
"prestige, privileges, and patronage that come from controlling a corporation and occupying its
principal offices"); id. § 3:06, at 3-47 ("[LJosing the prestige of a directorship may be of
considerable consequence to the shareholder."); cf. WILLIAM A. Klein & JOHN C. COFFEE, Jr.,
Business Organization and Finance: Legal and Economic Principles 174 (8th ed.
2002) ("[T]here is obvious psychic income associated with being a senior manager of a 'Fortune
500' firm or other well known corporation. ...").
175. See Ingle, 535 N.E.2d at 1319 (Hancock, J., dissenting) (noting "the challenge, the
independence, the prestige, the feeling of achievement, and the other intangible benefits of
being part of the management of a successfully run small company"); Bahls, supra note 89, at
290-91 (clarifying that close corporation ownership includes "the social status and challenge of
operating one's own company and the satisfaction of providing employment to one's children");
id. at 299 n.96 (noting that "[i]ntangible amenities include the social status of operating one's
own company, together with the associated challenges"); id. at 319 n.212 (mentioning the "loss
of satisfaction and other qualitative perks associated with operating a business"); O'Neill, supra
note 167, at 668, 671 (describing the "psychological payoffs" that an "owner-manager"
anticipates when investing in a venture, including "the pleasure of being one's own boss, the
feeling of satisfaction in creating a viable enterprise and even the excitement of taking a
substantial risk"); Ragazzo, supra note 57, at 1110 ("Additionally, the employee may simply
derive satisfaction from working in a business that he himself takes a substantial part in
managing."); see also Bonavita, 692 A.2d at 124 ("[A] job in the family business probably
provides considerably more security than one might find in other employment.").

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inflict great harm upon a shareholder, even

receiving his proportionate share of the comp
If the goal of the shareholder oppressio
these broader components of the close c
investment,177 one would expect that
oppression would provide compensation
components. Significantly, however, the f
provide any compensation for the valu
management position - two central com
corporation shareholder's investment retu
the majority oppressively terminates the
employment and the minority is unabl
employment elsewhere, such "lost job"
presumably approximate the damages co
wrongful termination action - namely, back p
cases, front pay.180 In theory, additional sum
176. Close corporation employment has value beyond its u

earnings of a business. See supra notes 27-28 and accom
corporations often distribute their corporate earnings th
benefits rather than through the declaration of divide
corporation job, in and of itself, has significant value
commitment of capital to a venture. See supra notes 173-7
the benefits of close corporation employment).
177. See supra note 165 and accompanying text (descri
oppression doctrine).
178. See supra note 170 and accompanying text (descr
corporation shareholder's investment return).
179. See 2 MARK A. ROTHSTEIN ET AL., EMPLOYMEN
major element of damages in any discharge action is
commissions, or other payments, plus fringe benefits) t
discharge."); id. ("As a general matter, the employee should
mitigation amounts, from the date of the discharge until
employment would have ended earlier for a lawful reason.")
180. As commentators observe:
In addition to compensation lost in the past, plaintiffs often seek future damages, or
front pay, for some period of time beyond the date of the trial. The duty to mitigate
means that, if the court permits awards of front pay, they can go only to those
plaintiffs who have not been able to find other comparable employment after their
discharge; in many future damages cases, however, the employee has another job that
pays less than the former employment and argues that the defendant should have to
compensate him or her for the lifetime earnings differential.
M§ 9.24, at 583.
For example, assume that a terminated shareholder-employee was earning a "true" salary
of $90,000. Despite the best efforts of the shareholder-employee, comparable alternativ
employment can only be obtained at a $60,000 salary. The termination, therefore, robbed th
shareholder-employee of the ability to earn an additional $30,000 in salary in a comparable

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lost ability to work for oneself would also be required.181 In calculati

fair value for a buyout, however, none of the typical valua
techniques accounts for the value associated with the loss of a spe
close corporation position.182 This omission is particularly signif
given that a minority shareholder's expectations of employm
benefits and management participation are frequently damaged
oppressive conduct, as the typical shareholder oppression dis
involves the majority terminating the minority's employment
removing the minority from any management role.183 As the ab
discussion demonstrates, the fair value buyout leaves the employm
and management components of a close corporation sharehold
position. See supra note 173 (noting that a close corporation job is frequently associated
higher salary). If compensation for the fair value of a shareholder's investment inc
compensation for the lost job, the terminated shareholder would presumably receive $3
per year in back pay from the time of termination until the time of trial and, potenti
properly discounted front pay award representing the lost $30,000 per year for some speci
period of time into the future.
181. After all, back-pay and front-pay awards may not make a terminated shareh
completely "whole." Such awards do not compensate the shareholder for any loss of pr
caused by removal from a management position (except to the extent that the prestige
position was represented by a higher salary). Furthermore, such awards do not compensa
shareholder for any loss of intangible "be your own boss" value. See supra notes 173-75
accompanying text (describing the benefits of close corporation employment). These loss
of course, difficult to quantify, and assessing damages for them would be speculative a
See, e.g., Bahls, supra note 89, at 298-99 (discussing "the loss of an expectation of a voi
management," and observing that "[p]roblems inherent in quantifying the value o
expectation to intangible amenities often preclude the court from awarding any value for
the expectation").
182. See, e.g., Murdock, supra note 29, at 472 (calculating the losses of a shareho
employee earning $250,000 per year in salary before termination and $100,000 per year in
after termination, and implying that a standard buyout is not entirely satisfactory bec
does not compensate for this loss); cf. Bahls, supra note 89, at 296 ("Although dissolution of
corporation may enable the shareholder to generate income by reinvesting the proceeds
liquidation, it does not enable the shareholder to realize expectations of continuing employm
or participation in management."); id. at 298-99 (observing that "[a]warding the fair m
value of a shareholder's interest does not compensate for the loss of an expectation of a vo
management" because "[problems inherent in quantifying the value of this expectat
intangible amenities often preclude the court from awarding any value for loss o
expectation"). See generally PRATT ET AL., supra note 79, at 149-297 (discussing se
valuation methods - including discounted economic income, guideline company, merge
acquisition, asset-based valuations, and excess earnings - with no mention of adjustment
the value of a lost job or a lost management position); id. at 23-30 (discussing fair market v
investment value, intrinsic value, fair value, going-concern value, and liquidation value wit
mention of adjustments for the value of a lost job or lost management position).
183. See, e.g., Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 661 (Mass.
(involving a minority shareholder who was terminated from employment and removed fro
management position); In re Topper, 433 N.Y.S.2d 359, 362 (Sup. Ct. 1980) (same); Bal
Sylvester, 411 N.W.2d 383, 384-85 (N.D. 1987) (same).

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investment unprotected, even though these

always harmed in shareholder oppression dis
buyout remedy provides compensation to an
only for the value of the shareholder's propo
company.184 Thus, even if one believes that
award "overcompensates" an aggrieved inves
shares, such overcompensation could be justif
buyout woefully undercompensates the
compensate the investor at all) for other sub
oppressive behavior. To offset the uncomp
employment and management componen
investment, courts should reject discounts o
higher buyout price will help to remedy t
losses.185
In summary, by focusing on the context of shareholder

oppression disputes, the language of the dissolution statutes
themselves, and the operation of the buyout award, one can make a
strong case against the application of discounts. Nevertheless, courts
and commentators have frequently relied on other arguments to
reach the conclusion that discounts are inappropriate. Although the
same "no discounts" result is reached, often the arguments are, at
best, not particularly persuasive, or are, at worst, conceptually
unsound. Such arguments are problematic, particularly because other
courts may perceive their weaknesses and may, as a result, feel
compelled to apply discounts given the absence of any legitimate
ground for their rejection. The use of such problematic arguments is
worrisome, therefore, as there is some risk that prodiscount
184. See, e.g., supra Part II. A (describing the fair market value and enterprise value
approaches to the meaning of fair value).
185. Admittedly, any overcompensation provided by the lack of discounts is unlikely to be a
perfect dollar-for-dollar offset of the undercompensation caused by the buyout's failure to
account for employment and management harm. Depending on the numbers, "lost job" and
"lost management position" damages may be higher or lower than the dollar amount of the
discounts. Alternatively, a court may not be able to calculate such damages at all. The loss of
prestige and independence that potentially results from a termination of employment and a
removal from management may be difficult, if not impossible, to quantify. See supra notes 175,
181 and accompanying text (discussing damages for "lost prestige" and "lost ability to work for
oneself). Nevertheless, there is no doubt that such harm is frequently suffered by a frozen-out
minority shareholder and that the standard buyout award fails to compensate for it. See supra
notes 181-83 and accompanying text (noting the harms that a frozen-out shareholder typically
faces and the incompleteness of a buyout award). In many oppression disputes, therefore, the
undercompensation argument can, at the very least, serve as a justification for reducing
discounts, even if it cannot "mathematically" justify their wholesale rejection.

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precedent will be created, especially in jurisdictions that have not ye

taken a position on the propriety of discounts in the shareholde
oppression setting. Moreover, some of these arguments can, in certai
situations, be used against the interests of oppressed minority
shareholders.186 For these reasons, it is important to identify the
"weaknesses" of the case against discounts so that litigants can focus
on asserting the stronger and more credible arguments previously
discussed in this Article.
B. Weaknesses of the Case
1. The Dissolution Analogy. A number of courts and

commentators argue against discounts by focusing on the relationship
between the buyout remedy and the dissolution-for-oppression
statute. As mentioned, in many jurisdictions the shareholder
oppression action derives from state statutes that provide for a
corporation's involuntary dissolution in the event of oppressive
conduct by those in control.187 Nevertheless, the courts often view
dissolution as a drastic remedy.188 Thus, even when dissolution is the
only remedy specified in a statute, courts have felt empowered to
grant less severe relief.189
186. See, e.g., infra notes 217, 255-62 and accompanying text (discussing the compensatory
aspect of dissolution and the punishment rationale).
187. See supra notes 33-36 and accompanying text (discussing dissolution-for-oppression
statutes).
188. See, e.g., Bahls, supra note 89, at 296 (observing that "[c]ourts historically looked
askance at dissolution as an extreme remedy"); Robert W. Hillman, The Dissatisfied Participant
in the Solvent Business Venture: A Consideration of the Relevant Permanence of Partnerships
and Close Corporations, 67 MINN. L. REV. 1, 47 n.147 (1982) (noting that "courts frequently
view corporate dissolution as a 'drastic,' 'harsh,' or 'last resort' remedy"); Murdock, supra note
29, at 440 ("The cases in which courts refer to dissolution or liquidation as a drastic remedy, if
not legion, are certainly numerous." (footnote omitted)).
189. See, e.g., Davis v. Sheerin, 754 S.W.2d 375, 378, 380 (Tex. App. 1988) (observing that
the relevant Texas statute only provided "for the appointment of a receiver, with the eventual
possibility of liquidation" as a remedy for oppressive conduct, but concluding that courts "could
order less harsh remedies" under "their general equity powers in the absence of statutory
authority"); id. at 379 ("[CJourts of other jurisdictions have recognized a 'buy-out' as an
appropriate remedy, even in the absence of express statutory or contractual authority.").
In some jurisdictions, the relevant statutes expressly grant courts the ability to award
alternative, nondissolution remedies. See, e.g., MINN. STAT. Ann. § 302A.751 subd. 1 (West
Supp. 2000) (authorizing a court to provide "any equitable relief it deems just and reasonable in
the circumstances"); NJ. STAT. ANN. § 14A:12-7 (West Supp. 1999) (providing a list of
remedies).

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Within this setting, the prevalence of the buy

understand. A buyout allows a court to reme
without terminating a company's existen
continues in business with the majority st
minority exits the company with the fair val
The key point, however, is that the buyout re
of dissolution. As a result, courts have analog
scheme in wrestling with how the buyout re
Judicial authorities seem to make two distinct
although the contentions are related. Firs
proceeds are distributed to shareholders on a
distinguishing between controlling and non-
buyout remedy should also provide a pro rat
shares equally.192 Second, because dissolut
minority shareholder with some amount of co
lieu of dissolution should offer the mino
amount.193 Despite the appeal of these argume
their ability to justify a rejection of discounts.
a. The "Equal Treatment'" Aspect of Dissolution. When a

corporation is dissolved, shares of the same class are treated equally.
A distribution of dissolution proceeds provides an equivalent per-
share price, with no distinction made between controlling and
minority shares.194 In the oft-cited decision of Brown v. Allied
Corrugated Box Co.,195 the California Court of Appeal rejected a
minority discount by relying in part on this rationale. The Brown
court observed that "[h]ad plaintiffs been permitted to prove their
case and had the corporation been dissolved," then "upon
190. See Murdock, supra note 29, at 452 (describing dissolution as "judicially-imposed
[corporate] death" (quoting In re Radom & Neidorff, Inc., 307 N.Y. 1, 7 (1954)).
191. See supra Part I.D (discussing the buyout remedy).
192. See infra Part III.B.l.a (discussing the equal treatment aspect of dissolution).
193. See infra Part IILB.l.b (discussing the compensatory aspect of dissolution).
194. See, e.g., Brenner v. Berkowitz, 634 A.2d 1019, 1031 (NJ. 1993) ("In the case of
dissolution, a distribution results in the termination of the corporation's business, with its assets
being proportionately distributed to the stockholders."); Harry G. Henn & John R.
Alexander, Handbook of the Law of Corporations and Other Business
ENTERPRISES 992 (3d. ed. 1983) (describing the process of dissolution and notin
shareholders, subject to any applicable liquidation preferences and other
proportionately in the net assets remaining after the satisfaction of corpora
(footnote omitted)); infra note 196 and accompanying text (noting the pro r
dissolution).
195. 154 Cal. Rptr. 170 (Ct. App. 1979).

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distribution of the dissolution proceeds each of the sharehol

would have been entitled to the exact same amount per share, wit
consideration being given to whether the shares had been contro
or noncontrolling."196
It is certainly fair to assert that the equal treatment aspect
dissolution should apply to any remedy, such as a buyout, th
offered in lieu of dissolution. Indeed, the choice of dissolution as
statutory remedy for oppression may signal, at least implicitly,
legislatures favor a remedy that treats all shares equally.
Nevertheless, the equal treatment assertion refutes only the
application of the minority discount - not the application of the
marketability discount - because only the minority discount is
premised wholly on the distinction between controlling and
noncontrolling shares.197 The marketability discount, in contrast, may
apply to all close corporation shares, controlling or otherwise, on the
basis that close corporation shares are difficult to sell.198 Thus,
although the equal treatment aspect of dissolution can (and should)
be applied to a "substitute" buyout award, the analogy's significance
may be limited. Although it refutes the applicability of the minority
196. Id. at 176. Professor Murdock expresses similar sentiments:

[T]he events that trigger the need for a valuation are either an "organic" change that
squeezes out a minority shareholder, such as a cash-out merger, thereby giving rise to
dissenters' rights, or a suit for liquidation, generally predicated upon the oppressive
conduct of those in control, followed by a request for alternative relief in the form of
a judicially supervised buy-out. Both of these types of triggering events contemplate
pro rata or nondiscriminatory distributions or payments of value.
Murdock, supra note 29, at 483; see id. ("Similarly, with respect to distributions pursuant to
dissolution statutes, the essence of shares of the same class is that each share is entitled to a pro
rata portion of that class's claim on the corporation's assets."); id. at 484 ("Since the basic
schemes are pro rata in nature, discounting a minority interest would upset the even-handedness
inherent in the basic statutory schemes.").
197. See supra Part II.B (discussing the minority discount).
198. See, e.g., Balsamides v. Protameen Chems., Inc., 734 A.2d 721, 733 (N.J. 1999) ("Even
controlling interests in nonpublic companies may be eligible for marketability discounts, as the
field of potential buyers is small, regardless of the size of the interest being sold."); Blake v.
Blake Agency, Inc., 486 N.Y.S.2d 341, 349 (App. Div. 1985) ("A discount for lack of
marketability is properly factored into the equation because the shares of a closely held
corporation cannot be readily sold on a public market. Such a discount bears no relation to the
fact that the petitioner's shares in the corporation represent a minority interest."); PRATT ET
AL., supra note 79, at 47 ("Even controlling interests can suffer to some extent from a lack of
marketability. A majority but less than 100 percent control position may take longer to sell,
thereby reducing its present value by the time value of money, for example."); Pratt ET AL.,
supra note 90, at 430 ("Even controlling ownership interests suffer to some extent from a lack of
marketability. For example, it usually takes several months - and a significant amount of
expense and effort on the part of the owners - to sell a company.").

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discount, it has less force when used agai

discount - assuming that a court believes tha
stock is equally illiquid.199 If a court believes
are easier to sell than minority shares (such that a smaller
marketability discount, or none at all, is appropriate for controlling
interests),200 the equal treatment argument would have greater utility.
A minority shareholder might prevail in arguing for a reduced
"controlling shares" marketability discount on the ground that
discounting minority shares more than controlling shares violates the
equal treatment aspect of dissolution.
b. The Compensatory Aspect of Dissolution. Because a buyout

award is made in lieu of dissolution, some courts have asserted that a
minority shareholder should not receive less compensation in a
buyout than the shareholder would have received upon dissolution of
the company.201 Providing less compensation in a buyout than in
dissolution, it is argued, is particularly unfair in jurisdictions where
the majority can circumvent the minority's petition for dissolution by
electing to buy out the minority's shares.202 As one court observed,
"Minority shareholders should not receive less than this [dissolution]
value if, instead of fighting the dissolution action, the majority decides
to seek appraisal of minority shares in order to buy out the minority
and reduce corporate discord."203
199. See, e.g., Bahls, supra note 89, at 303 ("To the extent that discounts for lack of
marketability are shared by shareholders on a pro rata basis, shareholders' expectations of equal
treatment are not violated."); cf. Balsamides, 734 A.2d at 737 (citing the testimony of a
valuation expert who stated that "whether you [applied] a marketability discount to one
hundred percent of the shares of stock, fifty percent of the shares of stock, or twenty percent of
[the] shares of stock, the marketability discount would be the same").
200. See supra notes 133-35 and accompanying text (noting that a smaller marketability
discount, or perhaps no marketability discount at all, is appropriate for the sale of a controlling
interest in a close corporation).
201. See infra note 203 and accompanying text (citing authorities for the proposition that a
buyout should provide at least as much compensation as dissolution would provide).
202. See supra note 59 and accompanying text (describing election statutes).
203. Charland v. Country View Golf Club, Inc., 588 A.2d 609, 613 (R.I. 1991) (quoting
Robert B. Heglar, Note, Rejecting the Minority Discount, 1989 DUKE L.J. 258, 269 n.63); see
Brown v. Allied Corrugated Box Co., 154 Cal. Rptr. 170, 176 (Ct. App. 1979) ("[T]he statutes
suggest that a minority shareholder who brings an action for the involuntary dissolution of a
corporation should not, by virtue of the controlling shareholder's invocation of the buy-out
remedy, receive less than he would have received had the dissolution been allowed to
proceed.").

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Using the compensatory aspect of dissolution as an argument

against discounts, however, may not be particularly helpful. The
problem stems from the fact that the value of a company in
dissolution may be considerably less than the value of a company in a
buyout proceeding. Even when discounts are applied, a buyout award
might furnish more compensation than dissolution would provide. In
a dissolution proceeding, a company is generally sold - either intact as
an operating business (or "going concern"), or piecemeal on an asset-
by-asset basis.204 As an economic matter, a company whose value as
an operating business exceeds its piecemeal-asset value should sell for
the higher "going-concern" value, even in dissolution, as the
company's value as an intact business should attract a purchaser who
is willing to pay more than the mere sum of the firm's assets. In a
buyout proceeding, an operating company is also typically valued as a
going concern rather than as a defunct business whose value stems
only from its assets.205
If the going-concern value of a company sold in dissolution were
equivalent to the going-concern value of a company in a buyout
proceeding, the dissolution analogy would have some bite. Any
204. As a California court stated:

"[A] liquidation does not necessarily contemplate that the assets will be sold
piecemeal and the goodwill of the business sacrificed by a termination of the
business." It may be possible to sell the entire business as a going concern in
liquidation. "If that is true, then the moving parties should be entitled to a value
which takes into account that possibility, since such a sale of the entire business as a
going concern could be made in the liquidation if the dissolution were permitted to
proceed."
Mart v. Severson, 115 Cal. Rptr. 2d 717, 719-20 (Ct. App. 2002) (citation omitted) (quoting 2
Marsh et al., California Corporation Law § 21.08[C], at 21-45 (4th ed. Supp. 2001)); see
also id. at 724 ("The appraisers all agreed that this figure reflects [the company's] piecemeal
liquidation value, but that value is not equivalent to its fair value because [the company] could
have been sold as a going concern in liquidation on the valuation date."); id. at 726 (noting that
"[t]he fair value [of a corporation] is the liquidation value," but that "liquidation value can
mean going concern value if the corporation could be sold as a going concern in liquidation");
Brown, 154 Cal. Rptr. at 178 ("[H]ad the corporation been dissolved, its liquidation might very
well have been accomplished by a piecemeal sale of its assets."); Hillman, supra note 188, at 82
(equating a recovery in dissolution with "the liquidation value of corporate assets"); Murdock,
supra note 29, at 442 ("Often with a third party bidder and invariably with a shareholder
bidder . . . what will be purchased from the liquidating corporation are the assets of the
enterprise as a going concern."); id. at 443 (stating that "dissolution is not necessarily
synonymous with either destruction of the enterprise or with loss of going concern value"); id. at
447 (noting the possibility that a minority might receive only "dead asset" value upon
dissolution).
205. See supra note 86 (noting that fair value in a buyout proceeding is generally determined
on a going-concern basis).

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discounting of the minority's pro rata share o

a buyout would leave the minority shareholder with less
compensation than he would receive in dissolution. Market
imperfections in a dissolution sale, however, may lead to much lower
values for the company than a going-concern valuation outside of
dissolution. Indeed, "[b]uyers generally are unwilling to pay full value
for a business at a judicial sale even though it is a going concern."206
Such unwillingness stems from the following risks: (1) the risk of
losing the management team shortly after the sale,207 (2) the risk of
receiving inadequate or inaccurate financial statements prior to the
purchase,208 (3) the risk of competition from the seller,209 and (4) the
risk of adverse changes from abnormal operation of the business
before the purchase is completed.210 In a privately negotiated
206. Bahls, supra note 89, at 331; see also Murdock, supra note 29, at 443 n.127 (noting the
possibility that the sale of an operating business in dissolution may be "predicated upon a
distress sale situation" and that, as a result, less than going-concern value will be received); id.
("To realize going-concern value, either a competitive bidding, nondistress environment is
necessary or, with respect to a shareholder bidder, some legal constraint must be in place to
insure that a fair price is paid.").
207. See Bahls, supra note 89, at 331 (stating that "[b]uyers have no assurance that present
management of the company will continue to participate in management, even for a transition
period, after the sale," and observing that "[t]he problem is particularly acute in small
corporations in which managers tend to be independent-minded entrepreneurs not wanting to
be under the thumb of new owners").
208. As one commentator notes:
Buyers at judicial sales have little assurance that the information received about the
business is adequate to value the business or fairly reflects the financial condition of
the business
only bidder at the court-supervised sale is the defendant. Wit

the defendant has monopsony power and is able to drive t
levels.
Id.
209. See id. ("Buyers at judicial sales have little assurance that the seller's management will
not compete. Selling shareholders that compete with the corporation threaten to deprive the
buyer of valuable customer relationships which jeopardizes the value of the goodwill.").
210. See id. at 331 ("Buyers at judicial sales have little assurance that the current
management of the business will operate the business normally between the date of the buyer's
assessment of the price and the date control of the business is transferred.").
Purchase prices at dissolution sales are further depressed because buyers in dissolution
proceedings "must pay the full purchase price in cash at closing or within a relatively short
period of time." Id. at 332 n.273. In private transactions outside of dissolution, the parties can
increase the purchase price by allowing for payments in installments or, alternatively, by
providing sufficient time to secure adequate financing. See id. (discussing installment sales and
financing terms). Court-supervised buyouts may have similar flexibility. See, e.g., Royals v.
Piedmont Elec. Repair Co., No. 97 CVS 720, 1999 WL 33545516, at *15 (N.C. Super. Ct. Mar. 3,
1999) (stating, in an oppression dispute, that "[a] fair and reasonable purchase procedure should
provide that the purchase price be paid 25% at closing and the balance paid in the form of a

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transaction outside of dissolution, these risks could be reduced.2

Similarly, if the majority shareholder purchased the busines
dissolution, these risks could be minimized or eliminated as well
the majority shareholder would remain in control of the business
Yet even if the majority shareholder was the purchaser in dissolut
he would rationally bid only nominally higher than the depress
price that an outside bidder - a person who could not control
risks - would offer.213
Depending on the numbers, therefore, a shareholder ma
actually receive significantly more compensation through a buy
award at going-concern value - even a discounted buyout awa
than he would if the business were sold as a going concern
dissolution.214 When a business is sold piecemeal on an asset-by-a
promissory note which provides that the remaining principal be paid in three equal an
installments"); Bahls, supra note 89, at 328 n.258 ("Several state statutes permit the cour
order installment payments."); Hillman, supra note 188, at 83 (discussing the possibilit
"structuring] installment payments with a commercially reasonable rate of interest ov
extended period of time"); cf. Bonavita v. Corbo, 692 A.2d 119, 130 (N.J. Super. Ct. Ch.
1996) (appointing a "special fiscal agent" to consider the appropriate terms and conditions f
court-ordered buyout, including the interest rate, the payment schedule, and the need for
security). It is also worth noting that, if prospective purchasers know that a company's
part of an involuntary dissolution proceeding, their knowledge of the "distressed" nature o
sale may lead to lower bids.
211. See Bahls, supra note 89, at 331-32 (discussing ways to contractually reduce risk
privately negotiated transaction).
212. See id. at 332 (noting that, "as is usually the case, the majority shareholder . . . , beca
of a management position in the business, can control the risks described"). Indeed, a ma
shareholder purchasing the business can continue to operate it. The majority remains an ins
with access to the company's books, and the majority is, typically, the key manager
consequence, the majority shareholder can reduce or eliminate the risks of (1) losing th
management team (the majority, as the key manager, remains), (2) receiving inade
financial information, and (3) operating the business abnormally. Without a contr
noncompetition agreement, however, the majority is probably unable to control the risk of
former investors' establishing a competing business.
213. See id. (noting that a majority shareholder would simply buy the business at a c
supervised dissolution sale for "one dollar higher than the maximum an outside bidder w
pay"); id. at 332 n.275 ("The net result of court ordered dissolution is frequently the ma
shareholders buying the interest of the minority shareholder at a depressed price."); see als
at 332 ("The rational majority shareholder . . . would never pay the minority shareholder m
than the net cost to acquire the business at judicial sale.").
214. Professor Bahls provides an example of a company that is worth $1,000,000 on a g
concern basis outside of dissolution. See id. at 332 (assuming a $1,000,000 company value "if
corporation is sold in an arms-length transaction in which the buyer is able to elimina
substantially minimize the [various] risks"). He then assumes that the amount realized fo
company would only be $500,000 "if the business were sold at a court-supervised sale." I
these numbers, the proportionate interest of a 25 percent minority shareholder would be w
$250,000 on a going-concern basis outside of dissolution. Valued in dissolution, however,

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basis in dissolution, this compensation differe

further in favor of a buyout award, as the pi
of an enterprise is usually less than its going-
very least, a credible use of the dissolution a
court to compare the amount of the buyou
expected in dissolution - a comparison that c
make.216
At bottom, it is defensible to contend that dissolution value is the
compensatory "floor" in an oppression buyout proceeding.217
percent interest would be worth only $125,000. Thus, even if the 25 percent interest at going-
concern value ($250,000) was discounted by 50 percent, it would nevertheless provide as much
compensation as the same interest valued in dissolution. On these numbers, a buyout at going-
concern value, even with a substantial discount, provides more compensation to the minority
shareholder than dissolution would provide. See also Grato v. Grato, 639 A.2d 390, 401 (N.J.
Super. Ct. App. Div. 1994) ("It is undisputable that a shareholder's interest in a business under
a buy-out procedure will have a higher value than in dissolution, for the 'good will' or value of
the business is not reflected in the latter.").
215. See, e.g., Hillman, supra note 188, at 47 n.147 ("There is general acceptance of the
proposition that the going concern value of an enterprise is likely to exceed its liquidation
value."); id. at 82 (noting that liquidation value is "a technique of valuation which under most
circumstances can be expected to result in a lower figure than other approaches"); see also Mart
v. Severson, 115 Cal. Rptr. 2d 717, 721, 723 (Ct. App. 2002) (stating that appraisers calculated a
$1.48 million liquidation value and a $5.6 million going-concern value for the same company);
Bahls, supra note 89, at 297 ("When corporations are liquidated, they usually sell their assets for
cash. . . . Auction sales are fire sales. Rather than selling the entire business as a going concern,
the business assets might be sold separately. If so, the sale does not yield the full value of a
going concern." (footnotes omitted)).
216. See, e.g., Brown v. Allied Corrugated Box Co., 154 Cal. Rptr. 170, 176 (Ct. App. 1979)
(rejecting a minority discount by noting that a "minority shareholder who brings an action for
the involuntary dissolution of a corporation should not . . . receive less than he would have
received had the dissolution been allowed to proceed," but providing no comparison with the
amount of compensation that the shareholder would have received upon the dissolution of the
company); Charland v. Country View Golf Club, Inc., 588 A.2d 609, 613 (R.I. 1991) (rejecting a
marketability discount by observing that, in a buyout proceeding in lieu of dissolution,
" [minority shareholders should not receive less than this [dissolution] value," but providing no
comparison with the amount of compensation that the shareholder would have received upon
the dissolution of the company (quoting Robert B. Heglar, Note, Rejecting the Minority
Discount, 1989 DUKE LJ. 258, 269 n.63)).
Even if courts did make such comparisons, the dissolution analogy would likely result only in the
reduction of discounts - not in their elimination. For example, assume that an investor's pro rata share
of a company would be valued at $250,000 in a buyout proceeding at going-concern value, and at
$125,000 in a dissolution setting. See supra note 214 (providing a similar example). Discounts totaling
$125,000 or less would be permitted in the buyout proceeding, as a buyout award in such circumstances
would be equal to or better than a recovery in dissolution. Discounts totaling in excess of $125,000
would presumably be scaled back to $125,000, rather than eliminated in their entirety.
217. Because a buyout award is made in lieu of dissolution, a court may be just as likely to
characterize the expected recovery in dissolution as the compensatory "ceiling" in an oppression
buyout proceeding. See, e.g., Hillman, supra note 188, at 82 ("Since the ultimate remedy which

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Undoubtedly, there will be some circumstances in which the

argument is applicable, particularly when a court has chosen hig
discount percentages. With some companies, for example, the
minority shareholder and the majority shareholder may both b
interested in (and capable of) purchasing the business in dissolution
When such competitive bidding between insiders is present, one
might expect a sale price in dissolution that approximates what the
company would sell for outside of dissolution.218 In these
circumstances, the argument should, at a minimum, compel a court t
reduce the amount of the discounts to avoid awarding less than
dissolution value.219 The argument's weakness, however, stems from
the uncertainty surrounding whether it will apply in a particular
buyout situation.220 Given the imperfections of dissolution, th
argument, if properly applied by courts,221 may have little practica
effect in combating discounts.
2. The Punishment Rationale. Another common argument

raised in opposition to discounts asserts that discounts are unjustifie
can be granted to a dissatisfied shareholder is the right to compel . . . dissolution of th

enterprise, the valuation of the withdrawing participant's account under an expectations-base
analysis should yield no more than the amount which would be realized if the dissolution wa
ordered.").
218. Compared to an outsider purchasing a business in dissolution, a minority shareholder
faces considerably less risk when he purchases his own business. The minority shareholder is an
insider who likely was (or still is) an active participant in the management of the business. As a
consequence, the minority will typically have superior knowledge about the company's present
affairs and future prospects. See supra notes 207-10 and accompanying text (noting the risks
that buyers typically face when purchasing a business in dissolution).
219. See supra note 216 (providing an example).
220. Perhaps this uncertainty should always favor the oppressed investor. After all,
estimating what the shareholder would receive if the company were dissolved is likely to involve
a good deal of speculation. Because the oppressive conduct of the majority has created the need
to engage in this speculation, it is fair to resolve any uncertainty against the majority's interests.
See infra notes 311-14 and accompanying text (discussing the resolution of uncertainty). Given
that it is possible for a company's sale price in dissolution to approximate its sale price outside
of dissolution (e.g., a minority shareholder could engage in competitive bidding with the
majority shareholder), a court might fairly decide, for buyout purposes, that a company's value
in dissolution is equivalent to its going-concern value outside of dissolution.
221. Admittedly, courts have not seemed interested in properly applying the argument. As
mentioned, a proper application would presumably require a court to calculate what the
shareholder would expect to receive in dissolution and to compare that amount to the price of
the buyout. If the buyout price, through discounts or otherwise, is less than the dissolution
value, the buyout price would need to be increased. See supra note 216 (providing an example).
Instead of performing this comparison, however, courts seem to treat the argument as one that
inexorably leads to a bright-line rule of rejecting discounts. See supra note 216 (citing cases).

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because the majority shareholder is the party

allegedly acted) oppressively. This argum
overtones in that it characterizes the oppr
wrongdoer and it denies the majority a "be
buyout price) because of the majority's wrongdo
The New Jersey Supreme Court decisio
Protameen Chemicals, Inc.273 provides an
discount analysis that was influenced, at least arguably, by
punishment considerations. In Balsamides, the trial court found that
Leonard Perle, a 50 percent shareholder in the company, had
oppressed Emanuel Balsamides, the owner of the remaining 50
percent of the company's stock.224 In a rather unusual twist, the trial
court ordered the oppressing shareholder (Perle) to sell his 50 percent
ownership interest in the company to the oppressed shareholder
(Balsamides).225 In effect, the oppressed shareholder received the
right to buy out the stock of the oppressing shareholder - a reversal
of the typical buyout scenario.226 Significantly, the trial court based its
decision in part on its "belief that Perle was more at fault,"227
indicating that the court took Perle's misconduct into account when
deciding on the appropriate remedy.
The trial court applied a 35 percent marketability discount in
calculating the buyout price.228 On appeal, the appellate division
concluded that it was inappropriate to apply a marketability discount
given the circumstances before the court.229 The court's rationale was
based in part on the notion that the premise for a marketability
discount is absent when a buyer is acquiring sole ownership of a
corporation.230 As mentioned, controlling interests of close
corporations are easier to sell than minority interests of the same
222. See, e.g., Bahls, supra note 89, at 302 ("To require application of a minority discount in
this case would result in a windfall for majority shareholders which is inequitable particularly
when it is the majority shareholder who initially acted oppressively.'''' (emphasis added)).
223. 734 A.2d 721 (NJ. 1999).
224. See id. at 724 (listing the oppressive acts found by the court).
225. Id. at 724-25 (ordering Perle to sell his shares to Balsamides).
226. See supra note 56 and accompanying text (noting that the typical buyout is of the
oppressed investor's stockholdings).
227. Balsamides, 134 A.2d at 725.
228. Mat 726.
229. See id. (noting that the appellate division "disagreed with [a marketability
propriety in these circumstances").
230. See infra note 232 and accompanying text (explaining the rationale of th
division).

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company, as the market for controlling interests is larger and more

liquid. Thus, a marketability discount - a discount premised on the
difficulty of selling close corporation shares - should be smaller, or
perhaps inapplicable, when a purchaser winds up with a controlling
block.231 As the appellate division observed:
The problem with applying such a [marketability] discount in this
case is that there was no sale of Perle 's stock to the general public
nor was Balsamides buying an interest in the company, minority or
otherwise, that might result in the later sale of a partial interest to a
member of the public. Rather, this was a case of a fifty percent
owner buying the stock of the other fifty percent owner, resulting in
the buyer obtaining total ownership of the corporation.232
On appeal, the New Jersey Supreme Court rejected the position

of the appellate division and reinstated the 35 percent marketability
discount.233 Some of the supreme court's discussion indicates that it
believed that a marketability discount was appropriate on the facts
before it. The court seemed to argue that a later purchaser woul
discount even a 100 percent ownership interest in a close corporation
because of the absence of an established market and the
accompanying difficulties of liquidating an ownership position.23
231. See supra notes 133-35 and accompanying text (discussing the relationship
controlling interest and the marketability discount).
232. Balsamides v. Perle, 712 A.2d 673, 683 (N.J. Super. Ct. App. Div. 1998); see
683 & n.2 (noting that "[t]here is no question that if a minority interest in a c
corporation is sold to an outsider there is usually a marketability discount that must
to determine the fair market value of the shares," but also observing that "this
inapplicable to a transfer where the transferee will own all of the stock"); id. at 684 (
"[n]ot all jurisdictions agree that there should be no marketability discount in connec
transfer of controlling interests," but determining that the New Jersey oppression st
not warrant a departure from the sensible approach that would decline to apply a d
lack of marketability when one owner transfers his or her interests to another owne
turn becomes the corporation's sole shareholder").
233. Balsamides, 734 A.2d at 736 (reinstating the discount).
234. As the New Jersey Supreme Court stated:
The position of the Appellate Division ignores the reality that Balsamides is buyin
company that will remain illiquid because it is not publicly traded and pu
information about it is not widely disseminated. [The company] will continue to h
a small base of available purchasers. If it is resold in the future, Balsamide
receive a lower purchase price because of the company's closely-held nature. . . .
. . . [I]f Perle is not required to sell his shares at a price that reflects [
company's] lack of marketability, Balsamides will suffer the full effect of
company's] lack of marketability at the time he sells. Accordingly, we find
Balsamides should not bear the brunt of [the company's] illiquidity merely becaus
is the designated buyer. . . .

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an argument focuses on the reason for ap

discount - i.e., because subsequent purchasers
that are difficult to sell - and on whether that
circumstances before the tribunal.235 It is difficult to fault the
Balsamides court for addressing this central issue.
The problem with the Balsamides opinion is that some of the
supreme court's language suggests that its decision to reinstate the
marketability discount was actually motivated by its desire to punish
Perle for his oppressive conduct. The court explicitly noted that
failing to apply a marketability discount "would be unfair, particularly
since Perle was the oppressor and Balsamides was the oppressed
shareholder."236 Further, the court stated that, "[bjecause the
'equities' of this case quite clearly [lay] with Balsamides, it would
[have been] unfair to allow Perle to receive . . . undiscounted value."237
In describing the Balsamides decision, one authority observed that
the application of a marketability discount "penalized" Perle, and
that "[penalizing Perle[] . . . seems to have been exactly the result the
New Jersey court intended."238
. . . The fact that the buyer is known is irrelevant. When Balsamides eventually
sells, he will suffer the full effect of any marketing difficulties.
Id. at 735-36; cf. id. at 737 (citing the testimony of a valuation expert who testified that even 100
percent ownership interests in close corporations are subject to marketability discounts).
235. See supra Part II. C (describing the marketability discount); supra notes 133-36 and
accompanying text (discussing the applicability of a marketability discount when the majority
shareholder or the corporation is the purchaser).
236. Balsamides, 734 A.2d at 736.
237. Id.; see also id. at 737 (distinguishing another New Jersey precedent that disallowed a
marketability discount on the ground that "[application of the equities in the two cases. . .
dictates opposite results"); id. at 738 ("In cases where the oppressing shareholder instigates the
problems . . . fairness dictates that the oppressing shareholder should not benefit at the expense
of the oppressed. Requiring Balsamides to pay an undiscounted price for Perle's stock penalizes
Balsamides and rewards Perle.").
238. Jeffrey D. Bauman et al., Corporations Law and Policy: Materials and
Problems 35 (4th ed. Supp. 2000); see Eggart, supra note 86, at 240 (suggesting that th
Balsamides analysis may also advocate the "lack of marketability discounts as a punitiv
measure"); id. at 241 ("Forcing Perle [] to sell his shares to Balsamides at a marketabili
discount thus did not benefit the oppressor, it penalized him."); see also 2 AM. LAW INST., supr
note 98, § 7.22, at 325 (noting that fair value in the appraisal context should not incorporate
marketability discount except in "extraordinary circumstances," which requires "more than the
absence of a trading market in the shares," and suggesting that "the court should apply th
exception only when it finds that the dissenting shareholder has held out in order to exploit t
transaction"); Hollis, supra note 158, at 159 ("[T]here is an implicit contention in the A
[Principles of Corporate Governance § 7.22] that the 'lack of marketability' discount should
used as a punitive measure."); cf. Lawson Mardon Wheaton, Inc. v. Smith, 734 A.2d 738, 748
(NJ. 1999) ("The very nature of the term 'fair value' suggests that courts must take fairness an

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Although Perle, as the oppressive shareholder, was certainly at

"fault" in the Balsamides dispute,239 it is far from clear that such fault
should affect the applicability of a marketability discount. A
marketability discount is a well-accepted valuation convention that
reflects the economic reality that purchasers often pay less for close
corporation stock because, without an established market, such shares
are difficult to sell.240 Application of the discount should turn on
whether that economic reality is present on the facts of the case - that
is, will the buyout result in the purchaser owning a block of close
corporation stock that will be difficult to liquidate? If yes, a
marketability discount is appropriate.241 If no, a marketability
discount is inappropriate. The discount's application, in other words
is meant to turn on whether the purchaser will be left with an illiquid
stake in the company, not on whether the shareholder's conduct is
viewed as good or bad.242 Not surprisingly, one can apply a similar
analysis to the minority discount.243
As a conceptual matter, therefore, it makes little sense to use a
discount (or the lack thereof) as a means of punishment. Beyond the
absence of a conceptual fit, the use of a discount as a punitive tool has
related practical problems as well, as there is a significant risk of over-
equity into account in deciding whether to apply a discount to the value of the dissenting
shareholders' stock in an appraisal action." (emphasis added)).
239. Evidence of Perle's blameworthy conduct led the trial court to find oppression under
the relevant New Jersey statute. See Balsamides, 734 A.2d at 723-24 ("The trial court found that
Balsamides was an oppressed shareholder . . . and was entitled to buy-out Perle's interest in [the
companies] . . . ."); id. at 724 (listing Perle's oppressive acts).
240. See supra Part II.C (defining the marketability discount).
241. The amount of the marketability discount should bear some relationship to the
expected level of "liquidation difficulty." See supra notes 133-35 and accompanying text
(arguing that the marketability discount for controlling interests should be reduced, if not
eliminated, because controlling interests are easier to sell).
242. Cf. Hollis, supra note 158, at 159 (stating that " [flair value should measure the price,
not the person").
243. A minority discount is a well-accepted valuation convention that reflects the economic
reality that purchasers of stock, whether public corporation stock or close corporation stock,
will pay less for shares that lack voting control. See supra Part II.B (defining the minority
discount). Application of the discount, therefore, should turn on whether this economic reality
is present on the facts of a case - i.e., will a buyout result in a purchaser owning a minority
position in a close corporation? If yes, a minority discount is appropriate. If no, a minority
discount is inappropriate. The minority discount's application, in other words, is meant to turn
on whether a purchaser will be left with a minority stake in a company, not on whether a
shareholder's conduct is viewed as good or bad. See supra notes 122-32 and accompanying text
(discussing the applicability of a minority discount when a majority shareholder or a corporation
is the purchaser). But see infra note 251 (discussing a possible relationship between the size of a
minority discount and the conduct of an oppressor).

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or under-punishing the oppressive shareholder. After all, a

marketability discount is poorly calibrated to the conduct of an
oppressive investor. Valuation experts derive marketability discounts
from empirical data comparing sales of illiquid securities to sales of
liquid, publicly traded securities.244 To fit the particular circumstances
of a given company, experts may adjust the data by considering a
number of factors,245 including the presence of a "put" right,246 the
existence of potential buyers,247 the prospect of a public offering or
sale of the company,248 and the existence of restrictive transfer
provisions.249 Neither the empirical data nor these factors, however,
have any relationship to the conduct of an oppressive shareholder.250
244. See, e.g., Pratt ET AL., supra note 79, at 334 ("[EJmpirical evidence . . . suggests that
discounts for lack of marketability for minority interest closely held stocks tend to cluster in the
range of 35 to 50 percent from their publicly-traded counterparts."); id. at 334-48 (summarizing
the findings of "[t]wo general types of empirical studies" on the marketability discount - studies
of "[discounts on sales of restricted shares of publicly traded companies," and studies of
"[discounts on sales of closely held company shares compared to prices of subsequent initial
public offerings of the same company's shares"); id. at 357 (noting the existence of empirical
data on marketability discounts for controlling interests); see also Balsamides, 734 A.2d at 728
(citing the testimony of a valuation expert who justified his application of a 35 percent
marketability discount on the ground that, "according to studies, thirty-five percent was a mid-
range or conservative discount rate" (emphasis added)); Hall v. King, 675 N.Y.S.2d 810, 814
(Sup. Ct. 1998) ("Both of the defendant's valuation witnesses approved a lack of marketability
discount greater than 10%. Both justified their choice of a figure by reference to an accepted
range of lack of marketability discounts as set forth in various appraisers' studies of private
stock transactions.").
245. See PRATT ET AL., supra note 79, at 358 (noting that "[t]here are degrees of
marketability or lack of it, which depend on the circumstances in each case," and listing factors
that "affect the degree of marketability" and that "should guide the analyst's judgment as to
where the subject interest should fall within the reasonable range of discounts for lack of
marketability").
246. See id. (stating that "the most powerful factor that could reduce or eliminate a discount
for lack of marketability would be the existence of a 'put' right," and describing a "put" as "a
contractual right that entitles the holder, at his option, to sell the stock to a specified party at
some time or under some specified circumstances"); id. ("In other words, a put guarantees a
market under specified circumstances.").
247. See id. ("The existence of a reasonable number of potential buyers or even one strong
potential buyer (often as demonstrated by past activity in the stock) could dampen the discount
for lack of marketability.").
248. See id. at 359 ("An imminent public offering or sale of the company could decrease the
discount for lack of marketability. . . . Conversely, if a company is committed to remaining
private and in the hands of current control owners for the foreseeable future, this would tend to
exacerbate the discount for lack of marketability.").
249. See id. ("Any provision that limits the right of the holder to transfer the stock would
tend to increase the amount of the discount for lack of marketability.").
250. The oppressive shareholder's conduct may, in some instances, play a small role in the
setting of the marketability discount. For example, another factor that experts consider in

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As a result, in most disputes the size of the marketability discount is

no more tailored to the "bad" conduct of the oppressive investor than
the current U.S. divorce rate is tailored to the "bad" conduct of the
oppressive investor.251 Even in the shareholder oppression context,
adjusting the empirical discount data is the level of dividend payments in a company, as shares
of companies paying low or no dividends are generally less marketable. See id. at 358 ("Stocks
with no or low dividends typically suffer more from lack of marketability than stocks with high
dividends. ... If the stock pays no dividend, the holder is dependent entirely on some future
ability to sell the stock to realize any return."). Similarly, an investor's ability to access company
information is a factor that affects the marketability discount. See id. at 359 ("The degree to
which information is or is not made available to minority owners and the reliability of that
information affects the discount for lack of marketability."). Because dividend suppression and
exclusion from company information are two common acts of majority shareholder oppression,
one could argue that a marketability discount is tailored, at least in part, to the "bad" conduct of
the majority (at least when these acts of oppression are present). Among different companies, in
other words, more significant instances of dividend suppression and information exclusion by
the majority should result in a higher marketability discount, all other variables being equal.
Despite this argument, it is still fair to assert that a marketability discount is not
sufficiently tailored to the conduct of an oppressive shareholder to justify the discount's
application (or the discount's denial) as a punitive device. When the majority's oppressive
conduct does not include dividend suppression and information exclusion, the factors
contributing to the size of the discount are wholly unrelated to the majority's actions. See supra
notes 244-49 and accompanying text (describing factors affecting the size of the discount); supra
notes 24-26 and accompanying text (providing examples of common acts of oppression). Even
when the majority's oppressive conduct does encompass dividend suppression and information
exclusion, the effect of these arguably tailored factors is distorted by the other factors
contributing to the size of the discount that are unrelated to the majority's behavior. See supra
notes 244-49 and accompanying text (describing factors affecting the size of the discount).
Finally, it is not entirely clear that an assessment of the dividend payments and information
access factors should include the effect of any oppressive conduct. Cf. Pratt ET al., supra note
79, at 24 (noting that, under most interpretations of fair market value, "the willing buyer and
willing seller are hypothetical persons dealing at arm's length, rather than any particular buyer
or seller," and stating that "a price would not be considered representative of fair market value
if influenced by special motivations not characteristic of a typical buyer or seller"). If a correct
assessment of such factors requires an exclusion of the effect of any oppressive conduct, then
even those factors bear no relation to the majority's "bad" behavior.
251. See, e.g., Eggart, supra note 86, at 244 ("The percentage discount applied by a court
appointed appraiser or expert witness may or may not bear any nexus to the magnitude of the
wrongs perpetrated by the oppressing shareholder."). In some disputes, the size of the
marketability discount may be loosely (although insufficiently) related to the oppressive
shareholder's conduct. See supra note 250 and accompanying text (discussing the relationship
between the size of the marketability discount and the oppressive shareholder's conduct).
Compared to the marketability discount, the minority discount is perhaps better tailored
to the "bad" conduct of the oppressor - although still not enough to justify its use (or nonuse) as
a punitive device. Valuation experts typically derive minority discounts from empirical data
comparing "control acquisition prices with pre-acquisition minority interest transaction prices."
PRATT ET al., supra note 79, at 316; id. at 314 ("[T]his discounting from control value usually is
done as a two-step process, first for minority interest, then for marketability, each step drawing
as much as possible on empirical data available to assist in quantifying the respective discounts."
(emphasis added)). The empirical data may then be adjusted for the presence or absence of

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the punishment should fit the crime. If a

oppressive shareholder's conduct warrants
should mete out that punishment with da
remedies (e.g., payment of fees or injunctions
punishment- worthy behavior.252
certain factors that affect a minority shareholder's degree of c

applicable state statute provides for supermajority voting, ap
oppression; (2) the distribution of the company's shares among
provisions affecting control in the corporate documents, inc
presence of cumulative voting; and (5) the existence of contr
id. at 308-12 (discussing the factors); Pratt ET al., supra n
statutes, the subject company's articles of incorporation and
ownership of the subject company is distributed have a bear
noncontrolling and of the controlling stockholders."). Signifi
nor these factors have any direct relationship to the "bad" cond
At some level, however, the size of the minority discount
the majority shareholder using his control to take unfair advan
track record of oppressive conduct by the majority would pr
investor more than the absence of prior abusive conduct, poten
discount. Cf. Brown v. Allied Corrugated Box Co., 154 Cal
("[I]f . . . the controlling shareholder has been using his positio
ever accrue to the owners of the minority shares, then an a
value of the minority shares should be reduced even further
the size of the minority discount may have some relations
majority. Nevertheless, the effect of this arguably tailored "
distorted by, at a minimum, the empirical data- data unrela
shareholder - that are used to establish the size of the discou
"past oppression" factor would be diluted by the other factors
discount, such as the strength of the dissolution-for-oppressi
Finally, one could argue that a majority shareholder deemed
would be less likely to oppress again for fear of addition
oppressive conduct, in other words, may decrease the likelih
control in the future (and therefore may decrease the size of t
the prior oppression was judicially resolved against the majo
between the "bad" conduct of an oppressor and the size of a m
other relevant variables, and the effect of the relationship
remains fair to question the use of the minority discount as a p
252. For example, in addition to a buyout, oppression co
rectify specific instances of "bad" conduct by an oppressive
Davis v. Sheerin, 754 S.W.2d 375, 378, 388 (Tex. App. 1988) (af
damages for willful breach of fiduciary duty). Similarly, court
presumably in amounts that are at least loosely correlated with
oppressive shareholder. See, e.g., Balsamides v. Protameen Ch
(N.J. 1999) (noting that punitive damages in the amount of se
assessed against an oppressive shareholder); Davis, 754 S.W.2d
court's award of exemplary damages against oppressive shar
litigation fees can be awarded. See, e.g., CONN. GEN. STAT. A
(stating, in the buyout election statute, that "[i]f the court find
had probable grounds for relief under [the dissolution-for-oppr
the petitioning shareholder reasonable fees and expenses

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Admittedly, this suggestion might not significantly alter the total

award of relief. Courts might simply recharacterize the amount of th
marketability discount as a punitive damages award or some other
damages payment.253 Even a mere recharacterization, however, woul
have some benefit, as a court's effort to punish an oppressive investo
would be more clearly identified rather than obscured within a
discount analysis.254 This increased transparency would push courts t
justify their punishment awards as punishment and, in turn, appellat
courts would review such awards for what they are - punishmen
based on the conduct of the oppressor, not discounts based on the
presence or absence of certain economic conditions.
It is important to note that courts' use of discounts as a punitive
tool can also disadvantage a minority shareholder. Although tying
discounts to "fault" or "blameworthy" behavior usually works in the
oppressed minority's favor (either because a discount is not applied
when the oppressive majority is the purchaser, or because a discount
is applied when the oppressed minority is the purchaser), there is
nothing preventing a court from using a discount against an
oppressed, but "blameworthy," minority shareholder.255 For example
the typical close corporation distributes much of its earnings t
shareholders as employment-related compensation rather than a
dividends, usually for tax purposes.256 Assume that a minorit
shareholder engages in misconduct and is legitimately terminate
from company employment.257 Although the minority is now excluded
employed by him."). Finally, a court could enjoin an oppressive majority shareholder from
engaging in certain types of punishment-worthy conduct in the future. See, e.g., Patton v
Nicholas, 279 S.W.2d 848, 857 (Tex. 1955) (ordering, through a "mandatory injunction," the
immediate payment of reasonable dividends as well as future payments of reasonabl
dividends); Davis, 754 S.W.2d at 378, 388 (affirming the trial court's order that enjoined
oppressive shareholders from contributing disproportionately to a profit-sharing plan).
253. Cf. Emory, supra note 67, at 1158 n.19 ("[AJttempts to limit judicial discretion on the
issue of discounts may be relatively ineffective. Judges can arrive at desired fair values by simpl
accepting values that indirectly account for potential discounts.").
254. See Eggart, supra note 86, at 244 ("[L]ack of marketability discounts are too coarse a
[punishment] tool because they obscure courts' reasoning for deciding that a particular value
fair.").
255. Cf. Hendley v. Lee, 676 F. Supp. 1317, 1323 (D.S.C. 1987) ("Under generally
established equitable principles, fault is a factor to be considered by a court in fashioning
equitable relief under the statute, but in the case at bar, the court finds as a fact that both sides
contributed equally to the disharmony which precipitated this litigation.").
256. See supra note 27 and accompanying text (discussing the distribution of profit in close
corporations).
257. See supra note 53 (discussing justifiable majority conduct).

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from the vehicle used by the company to di

employment), assume that the company m
avoiding "true" dividends and continues t
dividends through employment compensation
Even though the majority was justified
minority's employment, it is undoubtedly
distributing the company's earnings through
minority is no longer an employee.258 Th
shareholder of the company and, as a shareho
pro rata portion of all earnings that the co
Nevertheless, it is not hard to imagine a court
minority for "causing," through misconduct,
earnings-distribution scheme of the compan
that indefinite exclusion from company earn
nonetheless determine that the minority's
degree of punishment.260 If a court orders a b
258. See, e.g., Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1017, 10

a minority shareholder who embezzled from the company w
employment, but concluding that the other shareholders "mu
share in the profits"); see also Exadaktilos v. Cinnaminson Re
(NJ. Super. Ct. Law Div. 1979) (concluding that a minority sh
oppressive in light of the minority's "unsatisfactory performanc
expectation of dividends was a separate issue that could pot
claim).
259. See, e.g., Michaud v. Morris, 603 So. 2d 886, 888 (Ala. 1992) ("Certain basic
expectations of investors are enforceable in the courts, and among those is a right to share
proportionally in corporate gains."); Baker v. Commercial Body Builders, Inc., 507 P.2d 387,
397 (Or. 1973) ("It is also true that the Bakers, as stockholders, had a legitimate interest in the
participation in profits earned by the corporation."); see also Cratty v. Peoria Law Library
Ass'n, 76 N.E. 707, 708 (111. 1906) ("Dividends among stockholders of the same class must
always be equal and without discrimination . . . ."); Leslie v. Boston Software Collaborative,
Inc., No. 010268BLS, 2002 WL 532605, at *9 (Mass. Super. Ct. Feb. 12, 2002) ("What must not
be done is to make payments only to the majority shareholders, payments having different
names or styles but being in reality dividends."); Henry G. Manne, Our Two Corporation
Systems: Law and Economics, 53 VA. L. Rev. 259, 274 (1967) ("[T]he directors may not declare
a dividend to some holders of a class of shares but not to others holding shares of the same
class.").
260. In the New York decision of Gimpel v. Bolstein, All N.Y.S.2d 1014 (Sup. Ct. 1984), a
close corporation distributed all of its profits as de facto dividends through employment
compensation. See id. at 1023 (describing the company "policy of distributing profits in the form
of salaries, benefits and perquisites, without declaring dividends"). A minority shareholder who
embezzled from the company was terminated from employment and was, therefore, excluded
from the company's profit-distribution scheme. See id. at 1017-18. The court ultimately
concluded that the "other shareholders need not allow him [the embezzling minority
shareholder] to return to employment with the corporation, but they must by some means allow
him to share in the profits." Id. at 1021. Despite this minority-friendly outcome, the court

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shares, the imposition of a minority or marketability discount may

serve as a quick and dirty way of assessing that punishment while stil
providing the minority with relief from the oppressive situation. Thus,
just as a court can use a discount to punish an oppressive majority, so
too can a court employ a discount to punish an oppressed, yet
blameworthy, minority.261 Either way, to the extent that a discount
decision is made for punishment reasons rather than for legitimate
economic reasons, the decision itself makes little sense.262
seemed to decide that the minority's fault nonetheless warranted some level of punishment
Although the minority had been excluded from ten years' worth of de facto dividends by the
time of the Gimpel opinion, the court provided no compensation to the minority for his pro rata
share of these past dividends. See id. at 1017, 1021-22 (observing that the majority must "by
some means allow [the minority] to share in the profits," but providing no compensation for
past dividends); see also supra note 259 and accompanying text (noting that dividends must be
distributed proportionately to all shareholders of the same class). Moreover, the court's
language suggests that this remedial omission was intentional. See Gimpel, 477 N.Y.S.2d at 1021
(stating that the minority's "past misdeeds provided sufficient justification for the majority's acts
to date'' and awarding only forward-looking relief (emphasis added)).
261. See, e.g., Vincent E. Gentile, New Jersey Supreme Court Rules on Marketability
Discounts in Valuation Cases, N.J. LAW., Dec. 1999, at 11 (noting that, in disputes between
shareholders, "no one is likely to be blameless, and each side is likely to have engaged in
conduct that can later be deemed unfair by a court"); cf. Pooley v. Mankato Iron & Metal, Inc.
513 N.W.2d 834, 837-38 (Minn. Ct. App. 1994) (considering the controlling shareholders'
argument that "a balancing of the equities" required a minority discount because the oppressed
minority investor had been terminated from company employment as a result of his crimina
conviction, but ultimately rejecting the discount); id. at 838 ("They [the controlling
shareholders] reason that [the minority's] criminal activities weigh against him receiving equa
value for his shares.").
262. If one believed that discounts should be tied to "fault" or "blameworthy" behavior, a
useful comparison to the appraisal context could be made. Minority shareholders in every
jurisdiction have the right to "dissent from certain corporate actions, primarily mergers and
other fundamental corporate changes, and to receive the appraised fair value of their shares.
Wertheimer, supra note 115, at 613-14 (footnote omitted); see also Emory, supra note 67, at
1163-64 ("Today, all states and the District of Columbia have statutes requiring corporations to
buy back their dissenters' shares at 'fair value' or at similar standards."). This right to relief "is
sometimes known as the dissent and appraisal remedy, dissenters' rights, or, simply, the
appraisal remedy." Wertheimer, supra note 115, at 614. Significantly, a dissenting minority
shareholder's right to a fair value appraisal can be triggered merely by the majority's benign
decision to engage in a merger or some other corporate transaction. In appraisal cases, in othe
words, the majority has not necessarily engaged in any blameworthy conduct. Nevertheless, the
prevailing view in such cases is that the statutory command to provide "fair value" to th
dissenter dictates an enterprise value approach and a corresponding absence of discounts. See,
e.g., Pueblo Bancorporation v. Lindoe, Inc., 63 P.3d 353, 363-64 (Colo. 2003) (adopting an
enterprise value approach to fair value and noting that such an interpretation is the "clear
majority view" in appraisal cases); Lawson Mardon Wheaton, Inc. v. Smith, 734 A.2d 738, 748
(N.J. 1999) ("[EJquitable considerations have led the majority of states and commentators to
conclude that marketability and minority discounts should not be applied when determining the
fair value of dissenting shareholders' stock in an appraisal action"). If fair value appraisals in
"no-fault" dissenters' rights cases avoid discounting the value of the minority's shares, it is

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3. The Liquidity Assertion. As a basis for rejecting the

marketability discount, some authorities have argued that the
shareholder oppression action, along with the accompanying
emergence of the buyout remedy, has created a new liquidity for close
corporation shares.263 Whereas in past decades a minority shareholder
was unable to exit from a close corporation in times of discord,264 the
modern buyout remedy for shareholder oppression has altered that
state of near-permanent illiquidity. As a result, proponents argue, a
discount based on the illiquidity of close corporation shares should be
rejected as a relic of history.265 Professor Murdock summarizes the
argument:
Clearly legislatures and courts have provided liquidity where

heretofore it either did not exist or existed on a more limited basis.
If courts are to consider all relevant factors . . . one very relevant
factor is the existence of legislatively and judicially created exits
from the corporation. It would be incongruous to discount the
shares of a minority shareholder for lack of liquidity when the
valuation is being done in connection with a proceeding that creates
liquidity.266
perverse to apply such discounts in the shareholder oppression context where the majority is
often culpable.
263. See infra note 266 and accompanying text (citing authorities and describing the liquidity
argument).
264. See, e.g., In re Pace Photographers, Ltd., 525 N.E.2d 713, 716 (N.Y. 1988) ("Prior to
1979, minority shareholders in close corporations who suffered abuse at the hands of the
majority lacked the options available to business partners and shareholders in public
corporations to extricate the value of their investments.").
265. See Murdock, supra note 29, at 484 (observing that "minority shareholders are no
longer helpless in the face of majority misconduct," and stating that "[t]he specter of being
'locked-in' but frozen out is being relegated to history"); infra note 266 and accompanying text
(describing the liquidity argument).
266. Murdock, supra note 29, at 486; see also Emory, supra note 67, at 1169 n.81 (describing
a trial court decision in which the referee "declined to apply a marketability discount under the
theory that the appraisal statute itself created a liquid market for the dissenter's shares");
Murdock, supra note 29, at 484-85 ("The development of the concept of fiduciary duties
running from those in control to minority shareholders, the restatement of oppression in terms
of the reasonable expectations of minority shareholders, and the development of a buy-out
remedy converge into a vastly changed posture for minority shareholders."); id. at 485
(describing an elected buyout case and stating that the court did not consider that "there now
was a market for the shares," and noting that "[i]t is illogical to ignore the existence of a market
in applying a discount predicated upon the lack of a market"); id. at 486 (stating that "[w]hile
the actual election to buy, or a court order mandating a buy-out, cannot occur until after suit is
filed, the legislation - or in some states, judicial decisions - creating this new market is already
existent," and observing that "[o]nce a buy-out remedy as an alternative to dissolution is in

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Although it is true that the emergence of the oppression doctrine

and the buyout remedy has created an exit where one previously did
not exist, it is an overstatement to contend that this development has
obviated the liquidity concerns of close corporation investors. Even
with the rise of the oppression doctrine, close corporation shares are
liquid only to the extent that an investor is willing to undergo the
significant time and expense of litigation, and only then if the
shareholder successfully proves oppression.267 Indeed, when a
majority shareholder has acted appropriately, the buyout remedy, in
the absence of an election, will be unavailable. Even if a minority
shareholder successfully proves oppression, it is uncertain whether a
court will order a buyout, as the choice of remedy remains within the
court's equitable discretion.268 The availability of a buyout remedy for
oppression, therefore, is far from a guarantee of liquidity to a close
corporation investor. A prospective purchaser of close corporation
stock must still concern himself with the fact that publicly traded
shares are sold "over the telephone in seconds . . . with a very small
commission cost,"269 while close corporation shares are usually sold, if
at all, only with considerable time and expense.270 Thus, the core
liquidity concerns prompting the marketability discount are, at best,
only marginally eased by the availability of a buyout remedy.
place, the position of the minority shareholder with regard to liquidity has changed
dramatically").
267. See, e.g., Hood et. al., supra note 79, at 442 ("Although minority shareholders do have
some protection under corporate law from the oppressive acts of those in control of the
corporation, obtaining judicial relief is a long, arduous, expensive, and uncertain process.
(footnote omitted)). Even in disputes in which the need to prove oppression is obviated by a
buyout election, litigation over the fair value of the minority's shares often involve
considerable time and expense. See, e.g., Advanced Communication Design, Inc. v. Follett, 615
N.W.2d 285, 288-89 (Minn. 2000) (involving litigation that commenced in 1996 and ended, at
the state supreme court level, in 2000, and noting the testimony of the expert witnesses whom
the parties hired to present valuation evidence).
268. See, e.g., Brenner v. Berkowitz, 634 A.2d 1019, 1031 (N.J. 1993) ("Although a buy-out
may be preferable to dissolution, other remedies may be more appropriate [than] a buy-out.")
id. at 1032 (noting that "when a statutory [oppression] violation occurs, a court retains it
discretion to fashion equitable remedies"); id. at 1033 (stating that "the trial court has th
discretion to choose the appropriate remedies"); id. at 1033-34 (upholding the trial court's
reinstatement of a minority shareholder to a director position and stating that "we find that the
quantity and substantiality of the acts of misconduct committed by defendants do not warrant
any more expansive relief).
269. Pratt et al., supra note 79, at 334.
270. See supra Part II.C (discussing the difficulties associated with selling close corporation
stock).

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A related argument against the applicat

discount posits that such a discount is inap
for the minority's shares has been foun
available purchaser in one transaction, how
liquidity difficulties associated with th
transactions. In fact, the basis for the mar
even a willing and available buyer will pay
liquidity because the buyer may have diff
down the road.272 Consequently, it is not
argue for the rejection of the marketabili
ground that a purchaser is present in the tra
C. Summary
Minority and marketability discount
shareholder oppression disputes. Argu
shareholder oppression context, the statut
over "fair market value," and the underco
buyout award offer strong support for re
adopting an enterprise value approach. Although arguments
premised on dissolution analogies, punishment rationales, and
liquidity assertions also seek to justify the rejection of discounts, such
arguments are of limited utility. When constructing a case against
discounts, litigants should downplay or eliminate these suspect
arguments in favor of the stronger and more credible grounds
discussed above.
IV. The Valuation Date
Separate and apart from the debate over discounts, the

determination of fair value is also critically influenced by the choice
of the valuation date. Even if the meaning of fair value were settled,
there would still be an independent question about when the fair
value of a corporation should be measured. This question is of
271. See, e.g., In re Gift Pax, Inc., 475 N.Y.S.2d 324, 328 (Sup. Ct. 1984) (involving a referee
who rejected a marketability discount on the ground that "[the respondent corporations], by
electing to purchase the petitioner's shares . . . , became the willing and available buyers").
272. See supra Part II.C (describing the marketability discount).
273. See, e.g., Balsamides v. Protameen Chems., Inc., 734 A.2d 721, 735 (N.J. 1999)
(rejecting the notion that the presence of a designated buyer renders the marketability discount
inapplicable); id. ("Balsamides is buying a company that will remain illiquid
the future, Balsamides will receive a lower purchase price because

nature.").

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enormous consequence to the relevant parties, as a company's value

is affected by internal and external factors that can materially change
over a short period of time.274 The designation of the valuation date
therefore, is an important inquiry in and of itself, as the choice of date
can significantly affect a court's ultimate fair value conclusion.
A. Current Framework
In a number of jurisdictions with election statutes, the statutes

themselves set forth a valuation date. In New York, for example, the
buyout election statute states that courts are to "determine the fair
value of the petitioner's shares as of the date prior to the date on
which such petition [for dissolution on the grounds of oppression] was
filed."275 Similar to this "date-before-filing" approach, election
statutes in other states prescribe a "date-of-filing" standard. In
California, for instance, the valuation date is specified as "the date
upon which ... [an involuntary dissolution for oppression] action was
commenced," although a "court may, upon the hearing of a motion
by any party, and for good cause shown, designate some other date as
the valuation date."276 Even in nonelection cases, courts tend to
274. As one authority observes:

The date, or dates, at which the business is being valued is critically important
because circumstances can cause values to vary materially from one date to another,
and the valuation date directly influences data available for the valuation
Many internal and external factors can cause changes in the

a company. Obviously, a sudden change in a company's e
unanticipated, can have a substantial effect on value. Also,
interest varies with the cost of capital, a factor over which in
little control. Major events, such as the signing or terminati
contract, can also have a dramatic, immediate impact on value.
Pratt et al., supra note 79, at 21; see Pratt et al., supra note
at which the business or professional practice is being valued is c
time spans, circumstances can cause values to vary materially fro
275. N.Y. BUS. CORP. Law § 1118(b) (McKinney Supp. 2003)
ACT. § 14.34(d) (2002) (stating that, when a buyout election
"determine the fair value of the petitioner's shares as of the da
petition [for dissolution] was filed or as of such other date as the
the circumstances").
276. Cal. Corp. Code § 2000(f) (West 1990); see also Minn.
2 (West Supp. 2000) (stating, in an election statute, that "[t]he
sold shall be the fair value of the shares as of the date of the com
of another date found equitable by the court"); NJ. STAT. Ann
1999) (stating that "[u]pon motion of the corporation or any sh
proceeding, the court may order the sale of all shares of the c
other shareholder who is a party to the proceeding to either
shareholder [s]," and further stating that "[t]he purchase price of

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analogize to election statutes for guidance. A

filing of the oppression action is usually designated as the
presumptive valuation date.277
B. A Rationale for the "Date of Filing"
Although many jurisdictions designate the presumptive valuation

date as the date the plaintiff files his shareholder oppression action,278
no case or statute sets forth a rationale for this choice. Because
election and nonelection cases may have different consideration
examination of each is helpful.
1. Election Cases. The corporation or the shareholders a

permitted by statute in some states to "elect" to purchase the sh
of a minority investor who seeks involuntary dissolution on
ground of oppression.279 Under the Revised Model Busi
Corporation Act, for example, the corporation or one or m
shareholders can elect to purchase the petitioning investor's sh
"within 90 days after the filing of the [dissolution] petition ... o
such later time as the court in its discretion may allow."280 Aft
election is made, the parties have sixty days to "reach agreement
the fair value and terms of purchase of the petitioner's shares."2
the parties fail to reach an agreement, the court, "upon applicati
any party, shall stay the [dissolution] proceedings and determine
fair value of the petitioner's shares as of the day before the da
which the [dissolution] petition . . . was filed or as of such other
as the court deems appropriate under the circumstances."282
fair value as of the date of the commencement of the [oppression] action or such earlier o
date deemed equitable by the court"); R.I. Gen. Laws § 7-1.1-90.1 (2003) (stating,
election statute, that the court shall determine fair value "as of the close of business on th
on which the petition for dissolution was filed").
277. See, e.g., Hollis v. Hill, 232 F.3d 460, 472 & n.39 (5th Cir. 2000) (stating, i
nonelection case, that "[t]he presumptive valuation date for other states allowing b
remedies is the date of filing unless exceptional circumstances exist which require an earli
later date to be chosen," and citing in support a New Jersey decision that designated the d
filing as the presumptive valuation date in accordance with the language of the New J
election statute); supra note 276 (citing the New Jersey election statute).
278. See supra notes 275-77 and accompanying text (setting forth the date of filing
presumptive valuation date).
279. See supra note 59 and accompanying text (discussing election statutes).
280. MODEL BUS. CORP. ACT § 14.34(b).
281. Id. § 14.34(c).
282. M§14.34(d).

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2004] SHAREHOLDER OPPRESSION AND "EAIR VALUE" 369
Election provisions are designed to serve as a counterbalance to

the dissolution-for-oppression statutes. Although an aggrieved
investor is entitled to petition for dissolution of a company on the
ground of oppressive conduct, shareholders who wish to continue the
business may elect to buy out the petitioner's ownership stake to
avoid any risk of dissolution.283 Thus, the purpose of the election
provisions is to provide the remaining shareholders with a mechanism
for continuing the business and, relatedly, to safeguard against the
risk of dissolution. In operation, an election usually circumvents any
liability inquiry and converts an oppression lawsuit into a mere
valuation proceeding.284 Indeed, because an election often occurs
before a court has made a finding of oppression, the election statutes,
in most instances, effectively create a no-fault "divorce" procedure.
The company at issue continues as a going concern under the control
283. See, e.g., In re Seagroatt Floral Co., 583 N.E.2d 287, 289-90 (N.Y. 1991) (stating that,
"[i]n order to afford the other shareholders the option to continue the enterprise as a going
concern, a buy out provision was concomitantly added [to] the Business Corporation Law," and
observing that, "[u]nder that provision, those interested in maintaining the business - a class of
'prospective purchasers' explicitly limited to the other shareholders or the corporation itself -
may within 90 days of the filing of [a dissolution] petition elect to purchase the shares owned by
the petitioners"); id. at 290 ("Thus, the Business Corporation Law protects both the right of the
allegedly oppressed shareholder to liquidate an investment at fair value and the right of the
remaining shareholders to preserve an ongoing - and likely prosperous - business."); In re Gift
Pax, Inc., 475 N.Y.S.2d 324, 326 (Sup. Ct. 1984) ("[The election statute] § 1118 was enacted to
protect majority shareholders so that they may buy out a minority shareholder who seeks
dissolution under [the dissolution for oppression statute].").
284. See, e.g., In re Friedman, 661 N.E.2d 972, 976 (N.Y. 1995) ("[O]nce the corporation has
elected to buy the petitioning stockholders' shares at fair value, 'the issue of [majority
wrongdoing [is] superfluous.'" (alterations in original) (quoting In re Pace Photographers, Ltd.
525 N.E.2d 713, 717 (N.Y. 1988)); In re Seagroatt, 583 N.E.2d at 290 ("Thus, once [the
corporations] elected to buy out petitioners, the misconduct charges became irrelevant. The
issue became one of valuation.").
In the appraisal context, Professor Wertheimer observes that some courts consider
evidence of majority wrongdoing or misconduct to be relevant to the valuation inquiry. As
Professor Wertheimer states:
Determining fair value in an appraisal proceeding depends very much on the

underlying factual assumptions made as to the future prospects of the business.
Inevitably the corporation, through its agents, will either testify as to those underlying
assumptions, or provide information to an expert witness for use by that witness in
determining fair value. In either case, the dissenting shareholder may then challenge
the underlying assumptions by attacking, with evidence of unfair dealing, the
credibility of the corporation's agents.
Wertheimer, supra note 115, at 686 (footnote omitted); see also Ala. By-Prods. Corp. v. Neal,
588 A.2d 255, 257-58 (Del. 1991) (concluding that evidence of unfair dealing is admissible to
impeach the valuation contentions of a party); In re Radiology Assocs., Inc., 611 A.2d 485, 498
(Del. Ch. 1991) (observing that the defendant's breach of fiduciary duty "undermine[d] the
credibility of the information" provided to the defendant's expert witness).

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of the majority shareholder, the allegedly agg

out of the business, and no finding of wron
court.285
In no-fault election cases, therefore, designating the date of filing

(or the date before filing) as the presumptive valuation date is
appropriate. With no finding of wrongdoing, there is no date of
oppression to serve as a viable alternative.286 A fixed date is needed so
that the corporation or the remaining shareholders can assess
whether purchasing the petitioner's holdings is both beneficial and
financially feasible.287 Stated another way, to determine if an election
is in a prospective purchaser's interests, the prospective purchaser
needs a fixed point in time to assess whether his interests are better
served by contesting liability or by making an election to purchase.
The date of (or before) filing arguably serves this purpose well. Later
valuation dates, such as the date of trial or the date of judgment, are
likely to involve a greater expenditure of resources. After all,
presumably a prospective purchaser would not be forced to make an
election until that later valuation date arrives.288 By that time, the
parties, as well as the court, are likely to have engaged in an
expensive and intrusive liability inquiry - an inquiry that an earlier,
date-of-filing election procedure would largely, if not wholly, avoid.289
285. See supra notes 56-57, 284 and accompanying text (discussing the benefits of a buyout
and the no-fault nature of the election procedure). But see infra note 330 (noting that some
election statutes allow a buyout election to occur after a court has found oppression).
286. See infra Part IV.C (discussing the use of the date of oppression). But see infra note 330
(noting that some election statutes allow a buyout election to occur after a court has found
oppression).
287. See, e.g., Waller v. Am. Int'l Distrib. Corp., 706 A.2d 460, 463 (Vt. 1997) ("The
[Vermont election] statute encourages electing shareholders to calculate whether it is in their
interests to buy out the petitioner or risk entry of a dissolution order."); id. ("Once they make
an election, several results ensue, each requiring a determinable focal date, including the posting
of a bond, the commencement of interest payable to the minority on the value of the shares to
be purchased, and the loss of the minority rights as shareholders.").
288. See, e.g., MODEL Bus. CORP. ACT § 14.34(b), (d) (2002) (stating that, in general, the
valuation date shall be the date the petition for dissolution was filed, and providing a
prospective purchaser with ninety days from that date to make an election to purchase).
289. Because a prospective purchaser must generally elect to buy within ninety days of the
date on which the dissolution petition was filed, the parties can hold off on significant discovery
into liability issues until that ninety-day period has passed. See, e.g., N.Y. Bus. CORP. Law
§ 1118(a) (McKinney Supp. 2003) (allowing an election, without leave of court, for ninety days
from the date of the filing of a dissolution petition); MODEL BUS. CORP. ACT § 14.34(b) (same);
supra notes 284-85 and accompanying text (noting that an election converts an oppression
lawsuit into a mere valuation proceeding). If a prospective purchaser could elect to buy up until

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2004] SHAREHOLDER OPPRESSION AND "FAIR VALUE" 37 1
In the election context, therefore, designating the date of filing as the

presumptive valuation date is sensible.
2. Nonelection Cases. Outside of the election context, the choice

of the date of filing is puzzling. One simplistic explanation for
choosing the date of filing is that such a date is easily established and
verified. Because the clerk's office will likely affix a manual or
electronic file stamp to the petition setting forth the date and time of
receipt,290 the date of filing is clear and indisputable. In contrast, an
alternative date of oppression may be difficult to pinpoint. Because
oppressive conduct often happens over a period of time, rather than
solely on one particular date,291 fixing a date of oppression as the
valuation date may require an assessment of when the most severe
acts of oppression occurred. Such an assessment is often open to
argument, rendering the date of oppression uncertain. Nevertheless,
the advantage of certainty associated with the date of filing is minor
at best, as a court is certainly competent to evaluate the evidence and
to choose a date when the most damaging oppressive conduct
occurred. Moreover, although the certainty rationale helps to explain
the choice of the date of filing over the date of oppression, it fails to
explain the inferiority of other dates that will ultimately be fixed (e.g.,
the date of trial, the date of judgment, or the date of entering the
buyout order).292
Perhaps a better rationale for choosing the date of filing as the
presumptive valuation date derives from the notion that an oppressed
investor is still an owner of the company, even after the oppressive
conduct has occurred. As an owner, the investor is entitled to
participate in the company's fortunes until his status as an owner, or
the date of trial or beyond, however, discovery into liability issues could not be avoided, as the
parties would need to prepare for trial on those particular issues.
290. See, e.g., N.Y. C.P.L.R. 304 (McKinney 2000) ("An action is commenced by filing a
summons and complaint or summons with notice. ... At ... filing, the original and a copy of
such papers shall be date stamped by a court clerk who shall file the original and maintain a
record of the date of the filing . . . .").
291. See, e.g., Hollis v. Hill, 232 F.3d 460, 472 (5th Cir. 2000) (noting that the oppressive
conduct found by the court took place between February 1998 and November 1998).
292. See, e.g., Hendley v. Lee, 676 F. Supp. 1317, 1327 (D.S.C. 1987) (choosing the date of
trial as the valuation date); Waller, 706 A.2d at 463 (choosing "the approximate date of trial and
decision" as the valuation date); infra notes 296-99 and accompanying text (discussing why
postfiling dates are inferior valuation dates).

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"shareholder," ceases.293 A majority's oppres

negate this basic shareholder right to partici
company's overall worth. From this persp
plaintiff minority's shares is properly aff
company's value- even changes that occur aft
has transpired - for as long as the minority rem
the filing of an oppression action is viewed as
be judicially divested of his shareholder status
be seen as the appropriate valuation date. On that date, the
minority's shareholder status has "unofficially" ceased for valuation
purposes, as the lawsuit often represents the minority's wish to
relinquish his ownership position and to end his association with the
company.295 In theory, a postfiling date (e.g., the date of trial or the
date of judgment) could also be appropriate given that the "official"
end of the plaintiff's shareholder status does not occur until the court
actually enters an order for the plaintiff to surrender his shares.296 A
presumptive postfiling valuation date is problematic, however,
because the parties' actions will be influenced by the litigation
context.297 In addition, because oppression lawsuits inevitably involve
valuation experts,298 there are practical problems associated with
293. See, e.g., Michaud v. Morris, 603 So. 2d 886, 888 (Ala. 1992) ("Certain basic
expectations of investors are enforceable in the courts, and among those is a right to share
proportionally in corporate gains."); Baker v. Commercial Body Builders, Inc., 507 P.2d 387,
397 (Or. 1973) ("It is also true that the Bakers, as stockholders, had a legitimate interest in the
participation in profits earned by the corporation.").
294. See supra note 293 and accompanying text (noting that a shareholder is entitled to
participate in a company's fortunes until his "shareholder" status ceases).
295. See, e.g., Willis v. Bydalek, 997 S.W.2d 798, 800 (Tex. App. 1999) (involving an
allegedly oppressed shareholder who sued for "a buy-out of [his] corporate interest").
296. See, e.g., MODEL BUS. CORP. ACT § 14.34(f) (2002) ("Upon entry of an order [directing
the purchase of petitioner's shares], the court shall dismiss the petition to dissolve . . . and the
petitioning shareholder shall no longer have any rights or status as a shareholder . . . , except the
right to receive the amounts awarded to him by the . . . court . . . ." (emphasis added)).
297. Once litigation commences, the majority will have an incentive to manipulate the
company's revenues and expenses so as to minimize the company's overall valuation. See 2
Oppression, supra note 20, § 7:21, at 7-114 ("Anticipating the buyout of a minority
shareholder, majority shareholders . . . may manipulate a corporation's financial records to show
no or little . . . assets and . . . earnings."); cf. Wertheimer, supra note 115, at 639 (noting that a
controlling shareholder "can conduct or manipulate corporate affairs in a manner that depresses
market prices prior to mergers").
298. See, e.g., Rapid- Am. Corp. v. Harris, 603 A.2d 796, 802 (Del. 1992) ("It is frequently
the case in appraisal proceedings that valuation disputes become a battle of experts.");
Balsamides v. Protameen Chems., Inc., 734 A.2d 721, 729 (N.J. 1999) (observing that valuation
disputes "frequently become battles between experts").

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setting postfiling valuation dates. If the valuation period extend

through (and potentially beyond) the date of trial, experts may be
unable to draw final conclusions about a company's value by the time
their reports are due, by the time their deposition testimony i
required, and perhaps even by the time their trial testimony is
needed.299
In summary, the date of filing is defensible as the presumptive
valuation date to the extent that it is deemed to reflect the
"unofficial" end of a plaintiffs shareholder status. Up until tha
the oppressed investor was entitled, as a shareholder, to partici
any changes in the company's value.300 It is important to note tha
rationale can work both for and against a plaintiff sharehold
changes in the company's value from the date of oppression
date of filing can encompass losses as well as gains.301 Thus, alt
court can emphasize the plaintiff's continuing "shareholder" st
justifying a filing-date valuation, it should be kept in mind th
plaintiff shareholder assumes the risk of negative changes
company's value until the time the oppression action is filed.
C. Plaintiffs Choice? An Argument for the "Date of Oppressi
Even if the date on which the shareholder files his oppre

action is viewed as the presumptive valuation date, there is o
strong argument for departing from the filing date and for us
299. But see supra note 292 (citing cases in which the date of trial was used as the
date). At the very least, setting a postfiling date of valuation, such as the date of trial o
of judgment, is likely to involve an even greater degree of speculation by the valuat
than company appraisals typically involve. See, e.g., Murdock, supra note 29, at 473 (no
valuation is an "inexact science"); Wertheimer, supra note 115, at 630 (observing th
testimony on valuation involves "inherent subjectivity and estimation"). After all, t
may be testifying about the company's value at some future, rather than past, date.
300. See supra note 259 and accompanying text (noting that "shareholder" status
one to participate in a company's fortunes).
301. For example, assume that a corporation is valued at $10 million on the d
oppressive freeze-out of a minority shareholder. Assume further that the minority sp
year in an unsuccessful attempt to negotiate a nonlitigation solution to the freeze-
minority then files suit for oppression. If the company's value over the past year has i
to $12 million by the date on which the lawsuit is filed, the minority is better off under
filing rule than a date-of-oppression rule. As mentioned, the rationale would emphasize
minority, as a shareholder, is entitled to participate in the corporation's gains. See s
259 and accompanying text (noting that "shareholder" status entitles one to partici
company's fortunes). If the company's value over the past year decreased to $8 m
course, the same rationale would work against the minority. As a shareholder, the
should also participate in the corporation's losses. Under these circumstances, the m
better off with a valuation keyed to the date of oppression rather than to the date of fi

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date of oppression instead. Many close co

invest in a company with the reasonable
investment entitles them to participate in t
venture.302 In a number of oppression disputes,
investor is wholly excluded from the compan
typical freeze-out scenario in which the
terminates the minority's employment and
management responsibilities, the minority ha
any participatory role in the company.303 B
forced the minority into this passive, nonpa
that unjustifiably frustrates the minority's
expectations304 - and because the majorit
decisions without any minority sharehol
argument that post-freeze-out changes in th
should not be ascribed to the minority's
minority has been wrongfully ousted from c
other words, it is only fair to conclude that the
shares should no longer be affected by the m
302. See supra notes 169-70 and accompanying text (discuss

of close corporation shareholders).
303. See, e.g., Balvik v. Sylvester, 411 N.W.2d 383, 388 (N.D
fired as an employee of the corporation, thus destroying the
investment. Any slim hope of gaining a return . . . and remaini
the business was dashed when Sylvester removed Balvik as a dir
Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 661
out in which the minority shareholder was ousted from com
524 N.Y.S.2d 457, 459-60 (App. Div. 1988) (same); In re Wiedy
487 N.Y.S.2d 901, 903-04 (App. Div. 1985) (same); Landstrom v
1997) (describing freeze-out situations as "typical of oppressio
304. See supra notes 169-70 and accompanying text (discuss
of close corporation shareholders).
305. See, e.g., Torres v. Schripps, Inc., 776 A.2d 915, 918,
2001) (choosing the date when a plaintiff shareholder was ter
valuation date); id. ("The decrease in the corporate value from
to September was not due to plaintiffs efforts, but may
shareholder's] lack of experience in managing the corporation. B
it was fair not to ascribe the losses to plaintiff.'" (emphasis add
court chose the date of the plaintiff shareholder's termination
the trial court's reasoning that "[t]he business was different af
was not in the control of the plaintiff who was the real m
(quoting the opinion of the trial judge)); see also Hughes v. Seg
Super. Ct. App. Div. 1983) (describing the trial court's determ
on which the oppressed plaintiff was fired and the date on whi
was entered, the judge "adopted the earlier date since the sub
company] could not be attributed to plaintiff's efforts").

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particularly when the minority specifically bargained for such

management participation and the majority has spurned that
bargain.306 The logical consequence of this argument is that a cour
should set the valuation date as close as possible to when the
oppressive exclusion from management occurred, as that date
signifies when the majority decided that the minority's participation
would cease.307
This date-of-oppression argument is premised on the notion that
the minority should not be held responsible for changes in th
company's value after the minority's role in management has
unjustifiably ended.308 Had the minority retained his management
306. See supra notes 169-70 and accompanying text (noting that many close corporation
shareholders have a reasonable expectation that their investment entitles them to participate in
the management of the company); see also In re Topper, 433 N.Y.S.2d 359, 365 (Sup. Ct. 198
("These reasonable expectations constitute the bargain of the parties in light of which
subsequent conduct must be appraised."); Sandra K. Miller, How Can the Reasonable
Expectations Standard Be Reasonably Applied in Pennsylvania?, 12 J.L. & COM. 51, 54 (1992)
(describing the reasonable expectations approach as a "departure from the bargain struck b
the majority and minority shareholders"); cf Bahls, supra note 89, at 321 ("Remedies fashione
to protect expectations help insure that innocent shareholders will realize their bargained-fo
benefit."); id. at 325 ("Because participation and rights in a closely held corporation are
normally negotiated, expectations are reasonable when they provide a basis for the bargain."
Murdock, supra note 29, at 465 (noting that, when applying the reasonable expectation
standard, "the crux is not identifying a traditional wrong but rather identifying the basis of the
bargain - what were the explicit or implicit conditions pursuant to which the parties associated
themselves together in the corporate form"); Ralph A. Peeples, The Use and Misuse of th
Business Judgment Rule in the Close Corporation, 60 NOTRE DAME L. REV. 456, 504 (1985) ("
a shareholder's reasonable expectations have been frustrated, the shareholder has lost th
benefit of the original bargain.").
307. See, e.g., Hendley v. Lee, 676 F. Supp. 1317, 1327 (D.S.C. 1987) ("In cases of minorit
stockholder oppression, the date of ouster seems appropriately used."); Moore v. Carney, 26
N.W.2d 614, 617 (Mich. Ct. App. 1978) (noting that the trial court "required defendants t
purchase the stock from [the oppressed minority] at the value of the stock in 1969," an
observing that the "oppressive acts . . . began in 1969"); Pooley v. Mankato Iron & Metal, Inc.
513 N.W.2d 834, 836 (Minn. Ct. App. 1994) (choosing the date when the minority sharehold
was voted out as an officer as the valuation date); Prentiss v. Wesspur, Inc., No. 36321-2-1, 1997
WL 207971, at *1 (Wash. Ct. App. Apr. 28, 1997) ("'[F]air value' means the shares' value at th
moment just before the majority committed misconduct."); id. at *3 ("'Fair value' is determined
as of the time before the disputed action occurred
(noting that when the minority has been wrongfully ousted from
value of his shares should no longer be affected by the majority's d
308. This argument is inapplicable, therefore, when the alleged
result in an ouster from management participation. See, e.g., Hollis
Cir. 2000) (observing that a 50 percent shareholder in a tw
"commanded as much authority to assert control over the
shareholder); see infra notes 315-30 and accompanying text (discuss
potentially applicable, however, in nonelection cases as well as in

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role, however, it is entirely possible that the

would have been made and that the same ch
value would have occurred. Stated differe
conduct had not taken place, there is no guar
would have been in a more favorable position,
by definition, could have been overruled by t
the minority to avoid sharing in any postopp
therefore, may seem unfair, as one cannot p
management participation would have caused
fortunes.310
Although there is clearly a good deal of

"causation" point, it is critical to note that th
ouster of the minority created this uncertainty
active managerial role would have prevented
the decline in the company's value.311 Ev
managerial role, perhaps the minority's m
caused the majority to rethink or abandon a
330 (noting that some election statutes allow a buyout election

oppression).
309. See supra notes 87-89 and accompanying text (discussin
with a minority interest).
310. Cf. Barnes v. Andrews, 298 F. 614, 616-17 (S.D.N.Y. 1
from general mismanagement, business incapacity, or bad ju
that a single director could have made the company successful,
have saved?"); id. at 617 ("[T]he plaintiff must show that, had
duty of care] done his full duty, he could have made the compa
broken its fall. He must show what sum he could have saved
any one guess how far a director's skill and judgment would
and what would have been the ultimate fate of the business,
v. Technicolor, Inc., 634 A.2d 345, 370 (Del. 1993) ("While
Barnes, a tort action, does not control a claim for breach of fid
311. See, e.g., Torres v. Schripps, Inc., 776 A.2d 915, 925
(citing testimony that "there had been a 'significant change' fo
minority shareholder] departure from the business, includ
financial stability," and further noting that "the plaintiff . . . w
"defendant [majority shareholder] did not know how to run
business"); id. ("The decrease in the corporate value from Feb
termination] to September was not due to plaintiff's efforts
majority shareholder's] lack of experience in managing the corp
312. Cf. Francis v. United Jersey Bank, 432 A.2d 814, 827 (
inactive director's objection and resignation may have had a
directors, and noting the trial court's conclusion that "[t]he
directors] were so blatantly wrongful that it is hard to see h
moderately firm objection to what they were doing" (quotin
392 A.2d 1233, 1241 (N.J. Super. Ct. Law Div. 1978)).

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the majority had rarely listened to the minority in the past, perhap
this time the majority would have been persuaded. The point, simply
put, is that no one will ever know with certainty what would have
happened because the majority oppressively denied the minority an
opportunity to participate.313 Because this uncertainty stems from the
majority's conduct, it is appropriate to resolve the uncertainty agains
the majority's interests.314 If a company experienced postoppression
losses, a court could legitimately presume that the minority's
managerial participation would have prevented the decline. On this
basis, a court could decide that the minority does not have to share in
the losses.
The Fifth Circuit decision of Hollis v. Hilt15 provides at least
indirect support for this date-of-oppression position. In Hollis, James
Hollis and Dan Hill were each 50 percent owners of a Nevada close
corporation.316 Hill was a director of the company and served as the
president. Hollis was a director and served as the vice-president.317
The spouses of Hill and Hollis comprised the two remaining members
of the board of directors.318 On December 8, 1998, Hollis filed a
shareholder oppression action against Hill.319 A few weeks after the
filing, "Hill terminated Hollis as vice-president and eliminated all of
his company benefits," although Hollis continued to serve as director
and corporate secretary.320
313. Cf. W. Page Keeton et al., Prosser & Keeton on Torts § 41, at 269-70 (5th ed.
1984) ("The fact of causation is incapable of mathematical proof, since no one can say with
absolute certainty what would have occurred if the defendant had acted otherwise.").
314. Cf. Murdock, supra note 29, at 480 ("Another perspective from which to view this
situation is for the valuation process to resolve doubts as to value against the person who forces
the sale."); id. ("In the situation in which the minority shareholder seeks a judicial buy-out
because of oppressive conduct, it is the conduct of those in control that forces the sale.").
315. 232 F.3d 460 (5th Cir. 2000).
316. Id. at 463.
317. Mat 460.
318. Id. at 463.
319. At the time the lawsuit was filed, tensions between Hill and Hollis were high. Hill had
ceased paying Hollis a salary and had threatened to close down the business and establish his
own comparable venture. Id. Hill, without authority, had moved the company's annuity business
to his own sole proprietorship. Id. Hill had also stopped sending Hollis any financial information
about the company, and he later stripped Hollis of various company benefits. Id. at 463-64. Hill
even terminated the employment of Hollis's wife. Id. at 464.
320. Id. at 464.

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The district court concluded that Hill's con

and ordered Hill to buy out Hollis's shares in
court chose a valuation date of February 2
court found that the oppression began."322 Ap
value had steadily declined between the date o
conduct began (February 28, 1998) and t
oppression lawsuit was filed (December 8, 199
agreed that Hill's conduct constituted oppress
with the district court's decision to value
commencement of the oppressive conduct
observed:
We do disagree . . . with the trial court's decision to use February

1998 as the valuation date for the buy-out. Although Hollis' [s]
relationship with Hill began to decline significantly in February
1998, many of the actions upon which we base our finding of
oppression occurred after this date. Hollis continued to receive his
agreed upon salary until September of 1998, when it was reduced by
50%. His salary was not reduced to zero until October of 1998. Hill's
unilateral decision to close the Florida office, discontinue the car
lease payments, and terminate phone service was not communicated
321. Technically, the district court found that Hill's actions amounted to a breach of
fiduciary duty. See id. at 466; supra notes 37-40 and accompanying text (discussing the breach of
fiduciary duty approach to shareholder oppression).
322. Hollis, 232 F.3d at 464; see id. at 471 (stating that "the [district] court determined that
Hill began his oppressive conduct on February 28, 1998").
323. See id. at 463-64 (describing the problems faced by the company); see also Brief of
Appellee James P. Hollis at 26, Hill v. Hollis, 232 F.3d 460 (5th Cir. 1999) (No. 99-20725)
(suggesting that the company's value declined after February 1998, and stating that "[t]he use of
any subsequent date [after February 28, 1998] would effectively be Hill's last oppressive act");
Appellant's Reply Brief at 9, Hill v. Hollis, 232 F.3d 460 (5th Cir. 1999) (No. 99-20725) (noting
that "the business was basically defunct at the time of trial").
324. In support of its finding of oppression, the Fifth Circuit stated the following:
[W]e conclude that Hollis demonstrated an injury as a shareholder. He was a founder
and 50% shareholder of Kb USA [the close corporation]. His positions as vice
president and director clearly resulted therefrom. He had no reason to expect he
would be able to sell his FFUSA shares for a higher price, meaning that the value of
his investment was tied directly to his employment. The benefits he received from his
investment were distributed in the form of salary and certain perquisites; the firm
never declared a dividend and paid no salary to its directors. Hill totally deprived
Hollis of those benefits by terminating his employment and salary, closing the Florida
office, and cutting him off from company benefits. As a result, Hollis' [s] shares in
FFUSA were rendered worthless. No offer was made by the corporation to purchase
Hollis '[s] shares at a fair price upon termination, and Hollis did not have the option of
selling his shares to another buyer.
Id. at 471.

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to Hollis until November of 1998. Hollis'[s] original complaint was

filed in the district court in December of 1998.325
Based on this language, it appears that the Hollis court felt th

February 1998 was not close enough in time to when most of
damaging acts of oppression occurred. The language supports
notion that a court should fix a date-of-oppression valuation at
time when the most serious acts of oppression take place, rather
at the time when the oppressive actions begin. Significantly, the c
went on to discuss the shareholders' abilities to participate in
management of the venture:
As an equal shareholder, Hill commanded as much authority to
assert control over the corporation as did Hollis. His [Hollis's]
failure to act on this authority until December of 1998 [the time
period of the filing of the lawsuit] was his choice. The presumptive
valuation date for other states allowing buy-out remedies is the date
of filing unless exceptional circumstances exist which require an
earlier or later date to be chosen. No such circumstances exist in this
case. Therefore, we conclude that the date of valuation for the court
ordered buy-out should be the date suit was filed herein. Use of this
date will take into consideration all of Hill and Hollis' [s] actions,
inactions, and prudent and imprudent business decisions which
affected the value of the business during the intervening period.326
This passage strongly suggests that the Fifth Circuit believed that
Hollis shared some of the responsibility for the decline in the
company's value from the date on which the oppressive conduct
began to the date on which the oppression lawsuit was filed. The
court implies that Hollis, as a 50 percent shareholder, could have
participated in the management of the business but simply chose not
to.327 Although one can question whether Hollis could, in fact, have
exercised some management control over the business,328 the broader
325. Mat 472.
326. Id. (footnote omitted).

327. See id.; see also Appellant's Brief at 52, Hill v. Hollis, 232 F.3d 460 (5th Cir.
99-20725) ("[I]t is undisputed that Appellee [Hollis] never exercised his pow
shareholders meeting or a directors meeting or to exercise his power as a co-owner, c
and officer.").
328. The Hollis court noted in several places in its opinion that Hill had effectiv
over the business. See Hollis, 232 F.3d at 466 n.16 (describing Hill as having
unfettered control"); id. (analogizing to partners who "clearly controlled [their] or
much like Hill"); id. at 468 n.21 ("Hill acknowledges that he had control
corporation]."). As a practical matter, therefore, it may not have been possible fo

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point is that the court seems to credit th

investor has the ability to participate in ma
should share responsibility for any losses th
may have caused. While the Hollis facts do n
converse of this proposition - i.e., when an in
participate in management due to oppressive
should not share in any losses that manage
caused - the court's observations lend some support for the
argument. Thus, when an investor truly has no ability to participate in
management - as in the typical oppression case in which an investor
with less than equal ownership is ousted from all company
involvement329 - the Hollis language suggests that an earlier date-of-
oppression valuation may be appropriate given that the oppressed
investor was wrongfully excluded from any postouster decisions.330
easily inject himself into the management of the business. Similarly, given that Hill was the
president of the company, it may not have been true that Hollis "commanded as much authority
to assert control over the corporation as did [Hill]." Id. at 472. Because Hollis and Hill had
equal representation on the board of directors, however, it does seem that Hollis was not in a
powerless situation. See id. at 463 (noting that Hollis, Hill, and their spouses comprised the
board of directors of the company).
329. See supra notes 302-04 and accompanying text (discussing the typical oppression
lawsuit).
330. Some jurisdictions allow a party to elect to purchase the petitioning investor's shares
even after the court has found oppression. See, e.g., MINN. Stat. Ann. § 302A.751 subd. 2
(West Supp. 2000):
In an action under subdivision 1, clause (b) . . . in which one or more of the
circumstances described in that clause is established [including oppression], the court
may, upon motion of a corporation or a shareholder . . . order the sale by a plaintiff or
a defendant of all shares of the corporation held by the plaintiff or defendant to
either the corporation or the moving shareholders ....
(emphasis added); see also N.Y. Bus. CORP. Law § 1118 (McKinney Supp. 2003) (stating, in an
election statute, that a prospective purchaser must elect "at any time within ninety days after the
filing of such [dissolution for oppression] petition or at such later time as the court in its
discretion may allow" (emphasis added)); R.I. GEN. LAWS § 7-1.1-90.1 (2003):
[O]ne or more of [a company's] other shareholders may avoid the dissolution [for
oppression]by filing with the court prior to the commencement of the hearing, or, in
the discretion of the court, at any time prior to a sale or other disposition of the assets of
the corporation, an election to purchase the shares owned by the petitioner at a price
equal to their fair value.
(emphasis added); MODEL Bus. CORP. ACT § 14.34(b) (2002) ("An election to purchase . . .
may be filed with the court at any time within 90 days after the filing of the [dissolution for
oppression] petition . . . or at such later time as the court in its discretion may allow.'''' (emphasis
added)). When such postliability elections occur, a court should consider whether the date of
oppression would serve as a more appropriate valuation date, particularly when the court
determines that the petitioner possessed a reasonable expectation of management participation
that was frustrated by the majority's oppressive actions. Depending on the circumstances,
therefore, one could make a date-of-oppression argument even in an election context.

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In the typical oppression dispute where the minority's reasonable

expectation of management participation is frustrated,331 therefore, it
may be appropriate to let the minority choose between the date of
oppression and the date of filing as the appropriate valuation date.332
Such a prominority proposition may seem inequitable, as a plaintiff
minority will undoubtedly choose the date that generates a higher
valuation - the date of filing when the company's value has improved
after the oppressive conduct, and the date of oppression when the
company's value has subsequently worsened. Nevertheless, in the
common freeze-out situation, the "plaintiff's choice" position is
defensible. As a shareholder, an oppressed minority is entitled to
participate in changes in the company's value, at least until he files his
lawsuit. Yet because those value changes might not have occurred if
the minority's bargained-for management role had continued as
expected, the minority should not be required to participate in those
changes.333 In light of the fact that the majority's ouster of the
minority created the uncertainty surrounding whether minority
participation would have prevented losses, any doubt on the issue
should be resolved against the majority. Thus, when a company has
declined in value after a minority's ouster, a court reasonably could
allow a date-of-oppression valuation on the presumption that the
minority's managerial input would have prevented the company's
decline. Similarly, when a company has increased in value after a
minority's ouster, a court reasonably could allow a date-of-filing
valuation on the presumption that the minority's managerial input
would not have prevented the increase.
Conclusion
The old story, so often told, of [an investor's] reply to the q

of what the shares in his company were worth, is very apt:
331. See supra notes 302-04 and accompanying text (discussing the typic
lawsuit).
332. Cf. Kenneth S. Abraham, The Forms & Functions of Tort Law 269 (2d ed.
2002) (noting that some courts allow successful fraud plaintiffs to choose between "benefit of
the bargain" damages and "out of pocket" damages because "there are times when the benefit-
of-the-bargain measure does not maximize the plaintiff's recovery").
333. See supra notes 311-14 and accompanying text (making a date-of-oppression
argument).

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"There are 51 shares," said he, "that are worth

49 shares that are not worth a - ."334
Such is the value, we are crassly (but re

minority shareholder's stake in a close cor
ability to control the direction of the com
liquidity of publicly traded stock, close corp
are worth less to outsiders in the typical purchase and sale
transaction.
Accepting this economic truth, however, does not inexorably
lead to the conclusion that "fair value" buyouts should incorporate
minority and marketability discounts. After all, valuation is
contextual, and a buyout in the shareholder oppression setting bears
little resemblance to a voluntary sale to outsiders. As this Article has
argued, it is far more accurate to view an oppression buyout as a
compelled redemption by insiders (typically insiders with control),
rather than as a willing sale to outsiders. When viewed in this manner,
minority shares are, in fact, worth a " - ," as they represent a partial
ownership stake in an existing business venture. When that stake is
involuntarily relinquished as a result of oppressive behavior, the
aggrieved investor should be compensated for what he has given up -
i.e., a proportionate share of the company's overall value. The
enterprise value interpretation of fair value properly captures this
notion by rejecting discounts and by avoiding the voluntary sale
conception that plagues the fair market value approach - a
conception that poorly describes the realities of the shareholder
oppression setting. Moreover, the conscious legislative use of the
term "fair value" rather than "fair market value" in oppression
buyout statutes, and the inherent undercompensatory nature of the
buyout award in oppression disputes, further support rejecting a fair
market value approach and spurning the use of discounts. Finally,
although courts and commentators have traditionally relied on
dissolution analogies, punishment rationales, and various other
arguments in opposing discounts, this Article has revealed that such
arguments should be asserted with caution, if at all, as they are often
of dubious validity.
In addition to building a case against discounts, this Article has
examined the critical issue of the valuation date. Although sound
334. Humphrys v. Winous Co., 133 N.E.2d 780, 783 (Ohio 1956) (quoting John H. Doyle,
Address to the Ohio State Bar Ass'n (July 1893)).

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reasons exist for measuring fair value as of the date of the filing of an
oppression lawsuit, this Article has contended that, in many cases, th
date of the occurrence of the oppressive conduct may serve as a more
appropriate benchmark. Such an argument sets the stage for the
suggestion that courts should allow an oppressed investor to choose
between a date-of-filing valuation and a date-of-oppression valuation
On the one hand, the oppressed minority remains a shareholder of
the company. As a shareholder, the minority is still an owner, and h
is entitled to participate in postoppression changes in the company'
value - at least until he files his lawsuit and "unofficially" ceases hi
shareholder status. On the other hand, when oppression involves the
wrongful ouster of a minority from management participation in th
business, one can make an equally valid argument that the minority
should not have to share in any postoppression changes in the
company's value. Indeed, the minority's bargained-for role in
company decisionmaking ended the moment that the oppressive
ouster occurred. Consequently, the minority's responsibility fo
company decisions arguably ended at that time as well. As this Articl
has suggested, therefore, a "plaintiff's choice" view of the valuation
date decision may, in certain circumstances, be an appropriate
position to take.
In conclusion, value is central to corporate law, and the close
corporation context is no exception. Fair value buyouts in
shareholder oppression disputes are quite common, and they show no
sign of abating. By rejecting the application of discounts and by
recognizing the importance of the valuation date, courts can insure
that "fair value," as a principle, lives up to its name.

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Shareholder Oppression and "Fair Value": Of Discounts, Dates, and Dastardly Deeds in

the Close Corporation

Stable URL: https://www.jstor.org/stable/40040488

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SHAREHOLDER OPPRESSION AND "FAIR

The doctrine of shareholder oppression protects a close

Copyright © 2004 by Douglas K. Moll.

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Moreover, the Article suggests that, in many

I. The Doctrine of Shareholder Oppression

A. The Nature of the Close Corporation

B. The Cause of Action for Oppression

D. The Buyout Remedy for Oppression

A. The Ambiguity of "Fair Value"

B. The Minority Discount

C. The Marketability Discount.

III. Building the Case against Discounts

A. Strengths of the Case

3. The Undercompensation Argument

1. The Dissolution Analogy

3. The Liquidity Assertion

IV. The Valuation Date

B. A Rationale for the "Date of Filing"

Value makes the world go 'round - at least the world of

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investment community celebrates it. The task of measuring value,

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stake in a company was $46,665.4 The trial co

4. See Advanced Communication Design, Inc. v. Follett,

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control and lack of liquidity is inappropriate. In the Minnesota

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saying that a company's value can change dra

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"overcompensation" caused by the absence of discounts is justified by

I. The Doctrine of Shareholder Oppression

A. The Nature of the Close Corporation

A close corporation is a business organization typified b

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shareholder is normally a detached investor w

traditional theory, ultimate authority resides with the board o

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corporation, the board is ordinarily controlled "by the shareholde

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often are distributed in major part in salaries

27. 1 Close Corporations, supra note 15, § 1.08, at 1-32; s

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In a public corporation, a minority shareholder can escape these

B. The Cause of Action for Oppression

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broadened, orders of actual dissolution have

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Following the lead of the Donahue court, several courts outsid

C. Measuring Oppression through "Reasonable Expectations"

The development of a shareholder's cause of action for

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close corporation shareholder to another.44 Th

44. See supra notes 37-40 and accompanying text (describin